Aggregate demand and supply, and macroeconomic problems

6 important questions on Aggregate demand and supply, and macroeconomic problems

What is pure competition?

A market structure in which a very large number of firms produce a standardized product and there are no restrictions on entry.

When is an economy in equilibrium?

When the rate of injections is equal to the rate of withdrawals from the circular flow.

What is a constant-cost industry?

An industry in which the entrance of new firms has no influence on the resource prices and thus no effect on the production cost. The supply is perfectly elastic: the costs do not change, therefore, the price is stable, so the output is very adaptable to price changes.
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How do the prices decrease in a decreasing-cost industry?

If the components cost less, the industry's cost of production also decreases. This means that there will be more production - this lowers the prices of the good. The long-run supply curve is downsloping.

What is productive efficiency?

Efficient production, meaning that the the price (P) equals Minimum ATC

What, in a situation of efficient allocation, does the price of a good reflect?

It reflects the relative worth of an additional unit of the product, ergo, the marginal benefit derived form it; it also reflects, along the same lines, the relative worth of the good sacrificed to obtain this good. Therefore, its price reflects the marginal cost, so P = MC, as well as minimum ATC.

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