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ARE BUSINESSES EFFICIENT?
Competitive firms are efficient and
monopolies are inefficient, but there are few if any purely
competitive markets or purely monopolistic markets
(monopolies). So what happens in the real world? Are
businesses efficient?
We learned that competitive firms
earn zero long run profits because there are no
barriers to entry and monopolies do earn long run
profits because entry is blocked. What about
monopolistically competitive markets where there are LOW
BARRIERS? What about oligopolistic markets where there are
HIGH BARRIERS? Guess what? If there are low barriers firms
will earn zero long run profits (monopolistic competition)
and if there are high barriers firms will earn long run
economic profits (oligopolies).
What about efficiency? We will learn
that both monopolistically competitive firms and oligopolies
are inefficient but not to the same degree. Monopolistically
competitive firms are only slightly inefficient and they do
provide society some additional benefits, but oligopolies
can be very inefficient and are closely watched by the
government.
General Outline for Each Product
Market Model:
1. Know the model's
characteristics and examples (See the "8/9a QUIZ - 4
PRODUCT MARKETS" quiz on our Blackboard site.)
2. Be able to explain the shape of the demand curve
3. Draw the short run equilibrium graphs for (a) profit
maximizing firms, (b) loss minimizing firms, and (c)
firms that will shut down
4. Draw the long run equilibrium graph and find the
profit maximizing quantity (WHAT WE GET), allocatively
efficient quantity (WHAT WE WANT), and the productively
efficient quantity. See the last 13 pages of the Unit 3
Yellow Pages ("3 Rules and 4 Models").
5. Understand any other issues associated with the
model
Never forget this: To maximize
profits businesses will produce the quantity where MR=MC.
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