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INSTRUMENT: Another term for a financial or legal claim on the physical goods, services, and resources of real side of the economy. Instruments are the means by which income is diverted between household, business, and government sectors. Common instruments are corporate stocks, government bonds, and paper currency.

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Lesson 16: Perfect Competition | Unit 4: Long-Run Equilibrium Page: 21 of 28

Topic: Entry And Exit <=PAGE BACK | PAGE NEXT=>

  • One of the key characteristics of perfect competition is perfect resource mobility.

  • The phrase that captures the mobility of resources in a perfectly competitive industry is entry and exit. It works like this:

    • New firms will enter the industry if economic profit is positive.
    • Existing firms in the industry exit if economic profit is negative.
    • Firms will neither enter nor exit an industry if economic profit is zero and all firms earn a normal profit.

  • The movement of firms into and out of the industry guarantees one outcome -- zero economic profit.

  • Zero economic profit is achieved when the market price is equal to average cost -- both short run (SRATC) and long run (LRAC).


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AVERAGE FIXED COST

Total fixed cost per unit of output, found by dividing total fixed cost by the quantity of output. When compared with price (per unit revenue), average fixed cost (AFC) indicates whether or not a profit-maximizing firm should shutdown production in the short run. Average fixed cost is one of three average cost concepts important to short-run production analysis. The other two are average total cost and average variable cost. A related concept is marginal cost.

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APLS

BROWN PRAGMATOX
[What's This?]

Today, you are likely to spend a great deal of time browsing about a thrift store wanting to buy either a coffee cup commemorating last Friday (you know why) or a wall poster commemorating the first day of spring. Be on the lookout for mail order catalogs with hidden messages.
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The average bank teller loses about $250 every year.
"And while the law of competition may be sometimes hard for the individual, it is best for the race, because it ensures the survival of the fittest in every department. "

-- Andrew Carnegie, entrepreneur

BPEA
Brookings Papers on Economic Activity
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