Perfect Competition in the Long-Run 1 You are a wheat farmer. You learn that there is a more profit...

Perfect Competition in the Long-Run

1

You are a wheat farmer. You learn that there is a more profit in making corn.

What do you do in the long run?

Copyright ACDC Leadership 2015

In the Long-run…•Firms will enter if there is profit•Firms will leave if there is loss•So, ALL firms break even, they make NO economic profit(No Economic Profit = Normal Profit)

•In long run equilibrium a perfectly competitive firm is EXTREMELY efficient.

2Copyright ACDC Leadership 2015

P

Q

P

Q5000

D

S

Industry Firm(price taker)

$15 $15

Side-by-side graph for perfectly completive industry and firm in the LONG RUN

3

MR=D

ATC

MC

8

Is the firm making a profit or a loss? Why?


***Price = MC = Minimum ATC***Firm is making NO economic profit

Firm is making positive accounting profit

Firm in Long-Run Equilibrium

4

P

Q

$15

4

MR=D

ATC

MC

8

There is no incentive to enter or leave the

industryTC = TR


Going from Short-Runto Long-Run


https://www.youtube.com/watch?v=SjZmnOAPKUM&index=11&list=PLE70CA726102FB294

P

Q

P

Q5000

D

S

Industry Firm

$15 $15

6

MR=DATC

MC

8

1. Is this the short or the long run? Why?2. What will firms do in the long run?3. What happens to P and Q in the industry?4. What happens to P and Q in the firm?


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

7

MR=DATC

MC

8

S1

$10

Firms enter to earn profit so supply increases in the industry

Price decreases and quantity increases


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

8

MR=DATC

MC

8

Price falls for the firm because they are price takers.

Price decreases and quantity decreases

S1

$10 $10 MR1=D1


P

Q

P

Q5000

D

Industry Firm 9

ATC

MC

New Long Run Equilibrium at $10 PriceZero Economic Profit

S1

$10 $10 MR1=D1


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

10

MR=D

ATCMC

8

1. Is this the short or the long run? Why?2. What will firms do in the long run?3. What happens to P and Q in the industry?4. What happens to P and Q in the firm?


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

11

MR=D

MC

8

S1

$20

Firms leave to avoid losses so supply decreases in the industry

Price increases and quantity decreases

ATC


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

12

MR=D

MC

8

S1

$20

Price increase for the firm because they are price takers.

Price increases and quantity increases

ATC

4000

MR1=D1

9

$20


P

Q

P

Q

D

Industry Firm 13

MCS1

$20

New Long Run Equilibrium at $20 PriceZero Economic Profit

ATC

4000

MR1=D1

9

$20


Going from Long-Run to Long-RunConstant Cost Industry- New firms entering the market does not increase the

costs for the firms already in the market.


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

15

MR=D

MC

8

Currently in Long-Run Equilibrium If demand increases, what happens in the short-run

and how does it return to the long run?

ATC


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

16

MR=D

MC

8

D1

$20

Demand Increases The price increases and quantity increases

Profit is made in the short-run

ATCMR1=D1

9

$20


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

17

MR=D

MC

8

D1

$20

Firms enter to earn profit so supply increases in the industry

Price Returns to $15

ATCMR1=D1

9

$20

7000

S1


P

Q

P

Q

D

Industry Firm

$15 $15

18

MR=D

MC

8

D1

Back to Long-Run EquilibriumThe only thing that changed from long-run to

long-run is quantity in the industry

ATC

7000

S1


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

19

MR=D

MC

8

What if demand falls?If demand decreases, what happens in the short-

run and how does it return to the long run?

ATC


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

20

MR=D

MC

8D1

$10

Demand Decreases The price decreases and quantity decreases

Loss is taken in the short-run

ATC

MR1=D1

7

$10


P

Q

P

Q5000

D

S

Industry Firm

$15 $15

21

MR=D

MC

8D1

$10

Firms exit to avoid losses so supply decreases in the industry

Price Returns to $15

ATC

MR1=D1

7

$10

S1


P

Q

P

QIndustry Firm

$15 $15

22

MR=D

MC

8D1

Back to Long-Run EquilibriumThe only thing that changed from long-run to

long-run is quantity in the industry

ATC

S1


Practice

23

24

2012 Multiple Choice #23

25

2012 Multiple Choice #38

27

2010 FRQ #1

28

https://www.youtube.com/watch?v=R4s02qcXKVo

Going from Long-Run to Long-RunIncreasing Cost Industry- New firms entering the market increase the costs for the firms already in the

market. (Only asked once on a FRQ- 2011 Form B)


P

Q

P

Q

D

S

Industry Firm

$15 $15

30

MR=D

Currently in Long-Run Equilibrium If demand increases, what happens in the short-run

and how does it return to the long run?


ATCMC

P

Q

P

Q

D

S

Industry Firm

$15 $15

31

MR=D

D1

$25

INCREASING COST IndustryThe price increases and quantity increases

Profit is made in the short-run

ATC$25


MC

P

Q

P

Q

D

S

Industry Firm

$15 $15

32

MR=D

D1

$25 $25


Firms enter to earn profit but fight for resources causing costs to increase

Price Falls to $20

S1ATC

MC

$20

ATC1MC1

P

Q

P

QIndustry Firm 33

MR1

D1


Firms enter to earn profit but fight for resources causing costs to increase

Price Falls to $20

S1

$20

ATC1MC1

2008 Audit Exam

Efficiency


•Perfect Competition forces producers to use limited resources to their fullest.•Inefficient firms have higher costs and are the first to leave the industry.•Perfectly competitive industries are extremely efficient

In general, efficiency is the optimal use of societies scarce resources

1. Productive Efficiency2. Allocative Efficiency

There are two kinds of efficiency:


Productive Efficiency- Producing at the lowest possible cost (minimum amount of resources are being used)Graphically it is where price equals the

minimum ATCAllocative Efficiency- Producing at the amount most desired by society (allocating resources towards the products society wants)

Graphically it is where price equals marginal cost 37Copyright

ACDC Leadership 2015

Single Firm MarketPr

ice

Pric

eQuantity Quantity

0 0

Long-Run Equilibrium

P MR

D

S

QeQf

ATC

Productive Efficiency: Price = minimum ATCAllocative Efficiency: Price = MCPure competition has both in

its long-run equilibriumWhat about in the short run?

MCP=MC=MinimumATC (Normal Profit)

P

9-38

SummaryPerfectly competitive firms are allocatively and productively efficient in the long-run

In the short-run, they are always allocatively efficient, but they are not productively efficient.


Perfect Competition in the Long-Run 1 You are a wheat farmer. You learn that there is a more profit...

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