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PERFECT COMPETITION, LONG-RUN ADJUSTMENT: A perfectly competitive industry undertakes a two-part adjustment to equilibrium in the long run. One is the adjustment of each perfectly competitive firm to the appropriate factory size that maximizes long-run profit. The other is the entry of firms into the industry or exit of firms out of the industry, to eliminate economic profit or economic loss. The end result of this long-run adjustment is a multi-faceted equilibrium condition that price is equal to marginal cost and average cost (both short run and long run).

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Lesson 20: Federal Reserve System | Unit 4: Monetary Policy Page: 15 of 20

Topic: Discount Rate <=PAGE BACK | PAGE NEXT=>

The discount rate is the interest rate the Fed charges for reserve loans to commercial banks.
  • The Federal Funds rate is for loans between commercial banks.
  • The discount rate is for loans from the Fed to commercial banks.
  • Banks borrow from the Fed when the need reserves to stay in business. The price they pay is the discount rate.

Why don't troubled banks use the Federal Funds Market?

  • Other banks are probably reluctant to extend a loan.
  • The entire banking system might be short of reserves.
  • The discount rate is typically lower than the federal funds rate.

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PERFECT COMPETITION, LONG-RUN EQUILIBRIUM CONDITIONS

The long-run equilibrium of a perfectly competitive industry generates six specific equilibrium conditions, including: (1) economic efficiency (P = MC), (2) profit maximization (MR = MC), (3) perfect competition (MR = AR = P), (4) breakeven output (P = AR = ATC), (5) minimum production cost (MC = ATC), and (6) minimum efficient scale (MC = ATC = LRAC = LRMC).

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During the American Revolution, the price of corn rose 10,000 percent, the price of wheat 14,000 percent, the price of flour 15,000 percent, and the price of beef 33,000 percent.
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