Download November 13, 2014

November 13, 2014
1.Lesson 3-7: LRE in Perfect
Competition
2.HW: Activities 3-8 and 3-9
Some Practice and Review
1. Create & Label the following 3 cost curves for a typical firm
MC, ATC, AVC, AFC
2. Remember: MC curve crosses ATC and AVC and their
respective minimum points
3. Create the following 5 MR Curves:
a. Exact Shut-down quantity and price- labeled D1=MR1, P1, Q1
b. Shut-down price and quantity on the curve- labeled D2=MR2,
P2, Q2
c. Loss minimizing price and quantity (label and shade in
economic loss) labeled D3=MR3, P3, Q3
d. Break-Even price and quantity (No economic profit) labeled
D4=MR4, P4, Q4
e. Maximizing profit price and quantity (label and shade in
economic profit) labeled D5=MR5, P5, Q5
The Long Run in Perfect Competition
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Firms can enter and exit the industry (based on profits or
losses)
Remember: No barriers to entry
Profits attract new firms & losses shun them
Profits=more firms=greater supply=lower price
Losses=less firms=less supply=higher price
Long Run equilibrium: Always at firms’ lowest ATC!!!
Let’s Graph This Stuff…
Now, since all firms are earning ZERO ECONOMIC
PROFIT in the Long Run, there is no more incentive for
new firms to join the market.
LRE in Perfect Competition
• LRE in Perfect Competition always exhibits:
1. Productive Efficiency: Price = ATCmin
(Consumers are getting product at lowest
possible price)
2. Allocative Efficiency: P = MC (Firm is
producing socially optimal quantity)
3. That’s why its called Perfect Competition 
LRE in Perfect Competition
• LRE is Price and Quantity Combo at which there is zero
economic profit based on market demand
• LR Supply Curve: Collection of different LRE’s based on
different levels of market demand
• 3 Types of LR Supply Curves:
1. Increasing cost industry: The entry of new firms, prompted
by an increase in demand, causes the long-run average cost
curve of each firm to shift upward.
• i.e.: entry of new firms into the software industry might, for
example, bid up the wages paid to computer programmers.
The entry of new firms into the home construction industry
might bid up the price of lumber.
LR Supply Curves cont.
• 2. Constant cost industry: The entry of new firms, prompted
by an increase in demand, does not affect the long-run
average cost curve of individual firms.
• i.e.: The entry of new firms into the retail industry, for example,
can employ workers at the same wage as existing firms
LR Supply Curves cont.
• 3. Decreasing Cost Industry: The entry of new firms, prompted
by an increase in demand, causes the long-run average cost
curve of each firm to shift downward
• i.e.: The entry of new firms into the cable television industry
might, for example, enable lower cost of using communication
satellites. The entry of new firms into the manufacturing
industry in a given city might enable a lower cost of electricity