AP Microeconomics AMSCO Guided Notes
3.6: Firms' Decisions to Enter or Exit Markets
AP Microeconomics Guided Notes
AMSCO 3.6 - Firms' Decisions to Enter or Exit Markets
Essential Questions
- How do firms decide how much to produce and whether they should enter or exit a market?
A. Short-Run Decisions
1. What is the profit-maximizing condition for firms and what two output decisions can firms make?
2. How do firms use the comparison of total revenue to total variable cost to decide whether to operate or shut down?
3. What are the three basic outcomes for a firm based on the relationship between price and average costs?
4. What is the positive output level and when should a firm choose to produce at this level?
B. Long-Run Decision to Enter
1. What is a profit-making opportunity and what types of firms consider entering new markets?
2. Under what condition do firms enter a market and how is this expressed mathematically?
C. Long-Run Decision to Exit
1. How does the decision to exit a market differ from a temporary shutdown decision?
2. What are sunk costs and how do they affect a firm's decision to shut down versus exit?
3. Under what condition do firms exit a market and how is this expressed mathematically?
D. Long-Run Supply Curves
1. What is a constant-cost industry and what does its long-run supply curve look like?
2. What is an increasing-cost industry and how does input price change affect the long-run supply curve?
3. How do firms respond when multiple firms enter a market and achieve a new long-run equilibrium?
E. Outside Factors
1. Barriers to Entry from Other Firms
1. What are barriers to entry and how do they affect market competition?
2. What is a first mover and how does brand loyalty serve as a barrier to entry?
3. How do economies of scale act as a barrier to entry for smaller firms?
2. Barriers to Entry from Government
1. What are patents and copyrights, and how do they serve as barriers to entry?
2. How long do patents and copyrights last, and what happens when they expire?
3. What types of government regulations can act as barriers to entry and why?
3. Barriers to Exit
1. What are barriers to exit and what are typical examples of these barriers?
Key Terms
positive output
zero output
sunk
constant-cost industry
increasing-cost industry
barriers to entry
first mover
barriers to exit