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Chapter 11Pure Competition in the Long Run
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-2
The Long Run in Pure Competit ion
• In the long-run• Firms can expand or contract capacity• Firms can enter or exit the industry
LO1
11-3
Profit Maximization in the Long Run
• Easy entry and exit• The only long-run adjustment we consider
• Identical costs• All firms in the industry have identical costs
• Constant-cost industry• Entry and exit of firms do not affect
resource prices
LO1
11-4
Long Run Adjustment Process
• Adjustment process in pure competition• Firms seek profits and shun losses• Firms are free to enter or to exit• Production will occur at firm’s minimum
average total cost• Price will equal minimum average total cost
LO2
11-5
Long Run Equil ibrium
• Entry eliminates profits• Firms enter• Supply increases• Price falls
• Exit eliminates losses• Firms leave• Supply decreases• Price rises
LO2
11-8
Long Run Supply Curves
• Constant-cost industry• Entry/exit does not affect LR ATC• Constant resource prices• Special case
• Increasing-cost industry• Most industries• LR ATC increases with expansion• Specialized resources
• Decreasing-cost industryLO3
11-10
LR Supply: Increasing-Cost Industry
90,000 100,000 110,000Q3 Q1 Q2
$50P1
S
Y1
Y2
Y3
D3
D1
D2
$45
$55P2
P3
LO3
11-11
LR Supply: Decreasing-Cost Industry
90,000 100,000 110,000Q3 Q1 Q2
$50P1
S
X1
X2
X3
D3
D1
D2
$45
$55P3
P2
LO3
11-12
Pure Competit ion and Efficiency
• In the long run, efficiency is achieved• Productive efficiency• Producing where P = minimum ATC
• Allocative efficiency• Producing where P = MC
• Triple equality• P= MC= minimum ATC
• Consumer surplus and producer surplus are maximizedLO4
11-13
Pure Competit ion and Efficiency
P MR
D
S
QeQf
ATC
MCP=MC=MinimumATC (normal profit)
P
Consumer surplus
Producer surplus
LO4
11-14
Dynamic Adjustments
• Purely competitive markets will automatically adjust to:• Changes in consumer tastes• Resource supplies• Technology
• Recall the “Invisible Hand”
LO4
11-15
Technological Advance and Competit ion
• Entrepreneurs would like to increase profits beyond just a normal profit• Decrease costs by innovating• New product development
LO5
11-16
Creative Destruction
• Competition and innovation may lead to “creative destruction”
• Creation of new products and methods may destroy the old products and methods
LO5