Download 6 pages

Figure 6
Perfect
Competition
Individual Demand
Curve
Firm Supply
Curve
Quantity
Demanded at
Different Prices
Quantity
Supplied at
Different Prices
Added
Together
Economics 101 – Section 5
Added
Together
Market Demand
Curve
Market Supply
Curve
Quantity Demanded
by All
Consumers at
Different Prices
Quantity Supplied
by All Firms
at Different
Prices
Market
Equilibrium
Lecture #19 – Tuesday, March 30, 2004
P
Chapter 8
-Competition in the Short-Run
-Competition in the Long-Run
-Technology in the Long-run
†
†
†
†
†
Including material since last midterm up to an including the
material for next Tuesday.
Actual Quantity
Supplied
by Each Firm
What is going on for individual firms when
there are changes in the market price?
„
Finish up wheat example from last day
Competition and short-run equilibrium
Long-run equilibrium
„
†
M
Pr arke
ice t
Competitive Markets in the SR
NOTE: Exam #3 Thursday April 8th
†
Q
Actual Quantity
Demanded
by Each Consumer
Lecture Overview
†
S
D
t
ke
ar e
M ric
P
Would obviously think that as prices go down
then firms are going to be worse off?
†
†
Entry and exit from the industry and the long-run
Why? Because they are getting less $
How does this tie into their cost structure and all these
graphs we have been using?
The role of technology
Start on monopoly
Figure 5
Deriving the Market Supply Curve
Price
per Bushel
Dollars
Market
Supply
Curve
MC
$3.50
2.50
2.00
d 1 = MR 1
ATC
d 2 = MR 2
AVC
d 3 = MR 3
1.00
0.50
d 4 = MR 4
d 5 = MR 5
1.00
0.50
Short-Run Equilibrium in
Perfect Competition
(a)
Market
(b)
Market
(a)
Firm
$3.50
Figure 7
(b)
Firm
Dollars
Price
per
Bushel
$3.50
4,000
5,000
7,000
Bushels
per Year
d1
Loss per
Bushel
at p = $2
2.50
2.00
2.00
1,000
2,000
MC ATC
S
$3.50
200,000
D1
400,000
700,000 Bushels
500,000
per Year
2.00
Profit per
Bushel
at p = $3.50
d2
D2
400,000
700,000 Bushels
per Year
4,000
7,000
Bushels
per Year
1
FIGURE 8b From Short-Run Profit to
Long-Run Equilibrium
Competitive markets in the Long-run (LR)
†
What happens to firms that are making profits in the
short-run? Those making losses?
„
MC
A
$4.50
ATC
In short,
†
†
†
Dollars
if there is profit more firms will enter
If there is loss, firms will exit the industry
. . . so each
firm earns an
economic profit
In a competitive market, economic profit and loss
are the forces driving long-run change
†
d1
The expectation of continued economic profit causes outsiders to
enter the market, the expectation of continued economic losses
causes firms in the market to exit
5,000
9,000
Bushels
per Year
FIGURE 8c From Short-Run Profit to
Long-Run Equilibrium
Competitive markets in the Long-run (LR)
†
Price
per
Bushel
S1
Long-run equilibrium
„
„
If there were profits in the short-run (SR) then
entry will shift the market supply to the right until
profits are eroded
If there were losses in the SR then exit will cause
the market supply to shift left until there are no
there are no longer any losses.
S2
$4.50
A
E
2.50
D
900,000
FIGURE 8a From Short-Run Profit to
Long-Run Equilibrium
Price
per
Bushel
Profit attracts
entry, shifting the
supply curve
rightward . . .
1,200,000 Bushels
per Year
FIGURE 8d From Short-Run Profit to
Long-Run Equilibrium
S1
A
$4.50
. . . until market
price falls to $2.50
and each firm earns
zero economic profit
With initial
supply curve
S1 , market
price is $4.50 . . .
MC
A
$4.50
2.50
ATC
d1
d2
D
900,000
Bushels
per Year
5,000
9,000
Bushels
per Year
2
Competitive markets in the Long-run (LR)
†
†
In the long-run all competitive firms will earn zero
economic profit (normal profit)
Why zero economic profit?
„
„
„
„
All competitive firms will select its plant size and
output level so that it operates at the minimum
point of its LRATC curve
Why? – This is the only point where profit is zero
in the long run and production still takes place
Perfect Competition and Plant Size
P=MC=minimum ATC=minimum LRATC
Competitive markets in the Long-run (LR)
†
What happens if there is a shift in demand? What will happen
to the long-run equilibrium?
The following is the scenario for an increasing cost industry
„
„
„
„
†
Figure 9
For every competitive firm in long-run
equilibrium the following must hold:
„
†
In long-run equilibrium:
„
†
Recall the difference between economic profit and
accounting profit.
A business or firm may be making positive accounting
profit but zero economic profit.
This zero economic profit basically implies that there is
not too much money to be made – i.e. there are acceptable
or normal profits to warrant continued operation but they
are neither large enough to entice further entry nor low
enough to cause additional exit
Competitive markets in the Long-run (LR)
†
Competitive markets in the Long-run (LR)
1) Move up MC in the SR and firms earn positive economic profits
2) Profits attract new entrants – this increases market supply and
drives up ATC
3) A new equilibrium will be occur where profits once again return to
zero with the new ATC curve
4) The long-run price will be higher than what it was before the
demand shock
Can use this new information to map out the LR market
supply curve
Figure 10 An Increasing-Cost Industry
Firm
Market
(a)
Price
per
Unit
(b)
Dollars
Dollars
LRATC
MC1
LRATC
Dollars
MC
B S1
S2
PSR
SLR
C
ATC1
P1
MC2 ATC
2
d1 = MR1
P1
A
E
P*
C
P2
P2
P1
B
PSR
A
d = MRSR
ATC2SR
ATC1
d2= MR2
d1= MR1
D2
d2 = MR2
D1
q1
Output
per
Period
q*
Output
per
Period
Q1
QSRQ2
Output
per
Period
q1 q2 qSR
Output
per
Period
3
Competitive markets in the Long-run (LR)
†
Monopoly
The long-run supply curve – is the curve indicating
the quantity of output that will be supplied at each
price after all long-run adjustments have been made
„
„
„
Increasing cost industry – The long-run supply curve will
be upward sloping
Constant cost industry – The long-run supply curve will
be flat (horizontal)
Decreasing cost industry – The long-run supply curve will
be downward sloping
Changes in technology
†
Under perfect competition – a technological
advance making production cheaper or more
efficient will cause the market supply curve to
shift right
†
This will result in a lower price (and likely a higher
quantity traded) in equilibrium
†
Early adopters may make SR profits, but in the LR all
firms will earn zero economic profit (or simply
normal profit)
Figure 11 Technological Change in
Perfect Competition
(b) Firm
(a) Market
Price
per
Bushel
Dollars
per
Bushel
S1
S2
ATC1
A
ATC2
d1 = MR1
$3
$3
B
2
2
d2 = MR2
D
Q1
Q2
Bushels
per Day
1000
Bushels
per Day
4