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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