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PERFECT COMPETITION, PROFIT ANALYSIS: A perfectly competitive firm produces the profit-maximizing quantity of output that generates the highest level of profit. This profit approach is one of three methods that used to determine the profit-maximizing quantity of output. The other two methods involve a comparison of total revenue and total cost or a comparison of marginal revenue and marginal cost.

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Lesson 3: Scarcity | Unit 3: Opportunity Cost Page: 9 of 17

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With limited resources and unlimited wants and needs, a lot of opportunities are forgone, a lot of alternatives can't be pursued. This is the idea of opportunity cost.

A definition:

  • Opportunity cost is the highest valued alternative foregone in the pursuit of an activity.
Three points related to this definition:
  • Foregone Alternative: Opportunity cost means NOT doing something else, not producing another good. Using resources to satisfy one want or need means they can't be used to satisfy another.
  • Highest Valued: Opportunity cost is all about giving up the best alternative possible, the most satisfying. Any activity has many alternatives. Opportunity cost is not all of these alternatives, only the most preferred, the highest valued.
  • Pursuit of an Activity: Using resources to produce goods that are consumed to satisfy wants and needs. The key economic activities foregone are production and consumption.

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AGGREGATE DEMAND DECREASE, LONG-RUN AGGREGATE MARKET

A shock to the long-run aggregate market caused by a decrease in aggregate demand resulting in and illustrated by a leftward shift of the aggregate demand curve. A decrease in aggregate demand in the long-run aggregate market results in an increase in the price level but no change in real production. The level of real production resulting from the aggregate demand shock is full-employment real production.

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