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ITE lecture 5, lecture 6 - Coggle Diagram

- - - - all firms in the industry are maximising profit
      - No firms has an incentive to enter or exit the industry because all firms are earning zero economic profit
      - the price of the product is such that the quantitive supply by the industry is equal to the quantity demand by consumer
  - - - for a constant cost industry is a horizontal line at a price equal to the longrun min average cost production
      - for a increasing cost industry price of inputs to production increase as the industry expands and the demand for inputs grows
      - for a decreasing cost industry price of inputs to production decrease as the industry expands and it can take advantage of it to make its inputs more cheaply
- - - - the market price is determined by industry demnd and supply
        
        firms are price takers
        
        firm's production decision will not affect market price
      - demand curve facing an individual competitive firm is given by a horizontal line，that means MR=P
        
        MR(q)=MC(q)=P
    - - R<VC
      - P<AVC
- - - - The term efficient means there is no change possible to make one party benefit without harming the other party. This is also known as Pareto efficiency.
    - - Total surplus = buyer's surplus + seller's surplus
      - Total surplus is buyer's reservation price – seller's reservation price
      - When surplus is maximized, no opportunity to gain from additional sales or purchases
    - - So the market price is the only price at which buyers and sellers cannot design a surplus-enhancing transaction.
      - The market equilibrium price leads to the largest possible total economic surplus.
      - Thus it implies that free market can produce and distribute goods and services efficiently.