chapter 11
DESCRIPTION
Chapter 11TRANSCRIPT
Chapter 11
Pure Compe**on 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 Competition
• 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
• Iden@cal costs • All firms in the industry have iden@cal 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 compe@@on • Firms seek profits and shun losses • Firms are free to enter or to exit • Produc@on will occur at firm’s minimum average total cost • Price will equal minimum average total cost
LO2
11-‐5
Long Run Equilibrium
• Entry eliminates profits • Firms enter • Supply increases • Price falls
• Exit eliminates losses • Firms leave • Supply decreases • Price rises
LO2
11-‐6
Entry Eliminates Economic Profits
LO3
(a) Single firm
(b) Industry
P P
q Q 0 0 100 90,000 80,000 100,000
ATC
MR
MC
$60
50
40 D1
S1
D2
$60
50
40
S2
LO2
11-‐7
Exit Eliminates Losses
(a) Single firm
(b) Industry
P P
q Q 0 0 100 90,000 80,000 100,000
ATC
MR
MC
$60
50
40 D3
S3
D1
$60
50
40
S1
LO2
11-‐8
Pure Competition and Efficiency
• In the long run, efficiency is achieved • Produc*ve efficiency • Producing where P = minimum ATC
• Alloca*ve efficiency • Producing where P = MC
• Triple equality • P= MC= minimum ATC
• Consumer surplus and producer surplus are maximized
LO4
11-‐9
Pure Competition and Efficiency
Single Firm Market
Price
Price
Quan*ty Quan*ty
0 0
P MR
D
S
Qe Qf
ATC
MC P=MC=Minimum ATC (normal profit)
P
Consumer surplus
Producer surplus
LO4
11-‐10
Technological Advance and Competition
• Entrepreneurs would like to increase profits beyond just a normal profit • Decrease costs by innova@ng • New product development
LO5