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Documented Problem Solving: The Long Run Competitive Market

Linda Wilson, University of Texas at Arlington
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Summary

During the lecture, the competitive market was introduced. A graph was used to demonstrate a competitive market in which there was an economic profit. The profit motive causes an increase in supply. As additional producers enter the market, the price of the product or service decreases. In the end, price will decrease until the long-run equilibrium situation is reached which means that the economic profit decreases to zero.

Learning Goals

Students will:

Context for Use

Students can work on their documented solution in class (individually or in groups) or as homework outside of class. This activity can be used in any class size or institution type. It is meant primarily for Principles of Microeconomics, but it could be used with other courses as a review.

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.

Answer: d

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.

Answer: T

Teaching Notes and Tips

Students need to understand the sequence of events that lead to the long-run competitive equilibrium of zero economic profit. They sometimes are confused because they think a company will not stay in business if it earns zero economic profit, but zero economic profit does not mean that there is no profit. Instead, the firms will still enjoy a normal profit, just not an economic profit.

Assessment

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.

  1. Review the distinguishing characteristics of a competitive market - low barriers to entry, homogeneous or standardized product, price-takers, many firms.
  2. Refer to the notes concerning economic profit and normal profit and think about the difference.
  3. Review the graph for a short-run competitive market with economic profits that was drawn in class.
  4. If firms are earning economic profits, according to the text, other firms will want to enter the market.
  5. 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.