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Market Supply Curve in the Short Run and Long Run quiz

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  • In the short run, what is the market supply curve the sum of?
    It is the sum of the individual firms' marginal cost curves, assuming the number of firms is fixed.
  • Why is the number of firms fixed in the short run?
    Because firms cannot enter or exit the market quickly in the short run.
  • At what point does an individual firm supply output in the short run?
    When the price is above the average variable cost, the firm supplies output equal to its marginal cost.
  • How do you calculate the market supply at a given price if all firms are identical?
    Multiply the quantity supplied by one firm at that price by the total number of firms.
  • What happens to the market supply curve if there are 1,000 identical firms?
    The market supply at each price is 1,000 times the quantity supplied by one firm at that price.
  • In the long run, what type of profit do firms earn?
    Firms earn zero economic profit in the long run.
  • Why do firms stay in business in the long run if economic profit is zero?
    Because economic profit includes opportunity costs, but firms still earn positive accounting profit.
  • What happens when price is greater than average total cost (ATC) in the short run?
    Firms make profits, which attracts new firms to enter the market.
  • What is the effect on market price when new firms enter the market?
    The market supply increases, causing the price to fall.
  • What happens when the market price falls below average total cost (ATC)?
    Firms make losses and some will exit the market in the long run.
  • At what point does the entry and exit of firms stop in the long run?
    When price equals average total cost (P = ATC), resulting in zero economic profit.
  • What does the long run market supply curve look like in a perfectly competitive market?
    It is a flat, perfectly elastic line at the price equal to minimum ATC.
  • Why is the long run market supply curve perfectly elastic?
    Because any quantity demanded can be supplied at the minimum ATC, as firms enter or exit to maintain this price.
  • What role do opportunity costs play in determining economic profit?
    Economic profit subtracts both monetary and non-monetary opportunity costs from total revenue.
  • How does the market reach equilibrium in the long run?
    Firms enter or exit until price equals minimum ATC, ensuring zero economic profit and stable market supply.