Write down the course objectives 4 through 6 from text
page 239:
4.
5.
6.
3. Outline
III.
Changing Tastes and Advancing Technology
A. The impact of a permanent decrease in
demand can be determined by looking at the effect in the market as a whole and at the
effect on individual firms.
1. In the short run, the price falls and market quantity decreases according to the
intersection of the short-run industry supply curve and the new demand curve.
2. The lower price causes the typical firm in the market to suffer an economic loss,
as the price falls below average total cost.
3. In response to losses, firms exit the industry, which shifts the short-run industry
supply curve leftward.
4. As the industry supply curve shifts leftward, the market price rises and the market
quantity decreases even more.
5. The long-run equilibrium occurs when the price rises sufficiently so that firms do
not incur economic losses (they earn normal profits), and hence firms stop leaving the
industry.
B. The impact of a permanent increase in demand is the reverse of the effect from a
permanent decrease in demand.
C. The ultimate change in the equilibrium price from a permanent increase or decrease
in demand depends on the presence or absence of external diseconomies and external
economies, which shape the long-run supply curve.
1. The long-run industry supply curve shows how the quantity supplied by an
industry changes when the price varies after all possible adjustments to the change in
price have been made.
2. In the absence of external diseconomies or external economies, the long-run supply
curve is perfectly elastic, so a permanent increase or decrease in demand has no long-run
effect on the price.
3. External diseconomies are "factors beyond the control of an individual
firm that raise its costs as industry output increases." The existence of
external diseconomies causes the long-run supply curve to slope upward. A permanent
increase in demand results in the long-run equilibrium price being higher than the initial
price.
4. External economies are "factors beyond the control of an individual
firm that lower its costs as industry output rises." In this case the long-run
supply curve slopes downward, and a permanent increase in demand ultimately results in an
equilibrium price lower than it was before the increase in demand.
D. Technological advances result in lower costs. The effect of technological advances
can be examined by distinguishing between the consequences for the entire market and for
individual firms:
1. Technological advances result in lower costs for firms that adopt the new
technology, and initially they earn an economic profit.
2. The presence of an economic profit causes other "new technology" firms to
enter the industry. The industry supply curve shifts rightward, causing a fall in price
and an increase in total industry output.
3. Eventually the price falls enough that an economic profit no longer can be reaped.
At this point, firms stop entering the industry. Only companies using the new technology
continue to operate. The equilibrium price is lower than it was before the technological
innovation, and the industry output is higher.
IV. Competition and Efficiency
A. Resources are used efficiently when no
one can be made better off without making someone else worse off. Three conditions are
required for efficiency:
1. Consumer efficiency — when consumers are unable to improve their
situation by rearranging their expenditures. A household’s demand curves show
the quantity demanded when the household has made the best use possible of its budgets.
Thus consumer efficiency is met at all points on the household demand curve.
a) External benefits are those reaped by someone other than the buyer of a
good. In the absence of external benefits, the market demand curve measures
marginal benefit, so points on the market demand curve are consumer efficient.
2. Producer efficiency — when firms cannot reduce the cost of making a
given amount of output by changing the mix of resources employed. When a firm operates on its
supply curve, it is producer efficient.
a) External costs are those imposed on someone other than the producer of a
good. In the absence of external costs, if the industry is on its supply curve (so that
all firms are on their supply curves), producer efficiency is achieved.
3. Exchange efficiency — when all gains from trade have been realized.
Gains from trade are the sum of consumer surplus plus producer surplus
B. In the absence of external costs or benefits, perfect competition is efficient.
C. External costs and benefits or the presence of monopoly can prevent the attainment
of efficiency.
1. Review Helpful Hints in your study guide.
2. Complete even-numbered Questions in your study guide
and check your answers.
3. If you watched Video #18, write one or more sentence about each of its three
episodes which will bring the episodes and lessons learned from them to mind.
4. If not done in class, complete the Two-Minute-Feedback.
8.
Summary (text page 260)
Changing Tastes and Advancing Technology
1. A permanent decrease in demand
leads to a smaller industry output and a smaller number of firms.
2. A permanent increase in demand
leads to a larger industry output and a larger number of firms.
3. The long-run effect of a change in
demand on price depends on whether there are external economies (price falls) or external
diseconomies (price rises) or neither (price remains constant).
4. New technologies increase supply
and in the long run lower the price and increase the quantity.
Competition and Efficiency
5. Resources are used efficiently when
o one can be better off without someone else being worse off.
6. Three conditions for the efficient
use of resources - producer efficiency, consumer efficiency, and exchange efficiency -
occur in perfect competition when there are no external costs and external benefits.
7. The two main obstacles to using
resources efficiently are the existence of external costs and external benefits and
monopoly.
9.
Preview
The chapter on Monopoly shows what happens
to prices, profits, and output when a single firm supplies the entire market.
Unfortunately for the consumer, prices will be higher and quantities will be lower than
those in competition. We will see that the monopoly market environment will not be
efficient.
10.
Two Minute Feedback
Take a minute and jot down the problem, idea, or concept that was
most interesting to you from this chapter.
Take another minute and jot down the problem, idea, or concept with which you struggled
the most.
