Documented Problem Solving: The Long Run Competitive Market
- explain the characteristics of the competitive market;
- illustrate a situation of short-run economic profit;
- demonstrate the entry of new firms into the market;
- explain the impact that the entry has on price;
- interpret the price change and the long-run equilibrium.
Context for Use
Description and Teaching Materials
For this exercise, the instructor will need a MC, T/F, or short answer question that involves critical thinking. Below is an example of a MC and a T/F question.
If the firms in a competitive market enjoy economic profit, over time:
a) Some firms will leave the market to earn higher profits in a different market.
b) The market-supply curve will shift to the left as more firms enter.
c) The equilibrium market price will rise because of the economic profit.
d) New firms will enter the market and economic profit will equal zero.
If the firms in a competitive market enjoy economic profit, over time new firms will enter the market and economic profit will be reduced to zero.
Teaching Notes and Tips
This rubric may be used by the instructor or students to assess the documented solving process. Recall that the correct answer is not the most important aspect of this approach. It is more important that students understand the process that they use when attempting to solve the problem.
- Review the distinguishing characteristics of a competitive market - low barriers to entry, homogeneous or standardized product, price-takers, many firms.
- Refer to the notes concerning economic profit and normal profit and think about the difference.
- Review the graph for a short-run competitive market with economic profits that was drawn in class.
- If firms are earning economic profits, according to the text, other firms will want to enter the market.
- Think back to market supply and market demand and how an increase in supply impacts equilibrium price.
References and Resources
Angelo, T.A. and Cross, K.P. (1993). Classroom Assessment Techniques: A Handbook for College Teachers. San Francisco: Jossey-Bass.