Download Chapter 8_2

Competitive Markets in the Long Run
• New firms can enter the market
• Existing firms can exit the market
• Profit and loss in the long run
– Economic profit - outsiders enter the
market
– Economic losses - firms exit the market
1
From SR Profit to LR Equilibrium
– Economic profit attracts new entrants
– Market supply curve - shift rightward
– Market price - falls
– Demand curve facing each firm - shifts
downward
– Each firm - decrease output
• Positive economic profit - attracts new
entrants until economic profit = 0
2
Long-Run Equilibrium
• Figure 8 From Short-Run Profit to Long-Run Equilibrium
Market
S1
Price per
Bushel
A
$4.50
Firm
Dollars so each firm earns
an economic profit. MC
With initial supply
curve S1, market
A
price is $4.50…
$4.50
d
ATC 1
D
900,000
Bushels
per Year
9,000
Bushels
per Year
3
Long-Run Equilibrium
• Figure 8 From Short-Run Profit to Long-Run Equilibrium
Market
Firm
S1
Price per
Bushel
S2
Dollars
MC
A
$4.50
2.50
A
d
ATC 1
$4.50
E
E
2.50
d2
D
900,000 1,200,000 Bushels
5,000 9,000
per Year until market price falls to
Profit attracts entry, shifting
$2.50 and each firm earns
the supply curve rightward…
zero economic profit.
Bushels
per Year
4
From SR Loss to LR Equilibrium
– Economic losses - firms exit the market
– Market supply curve - shift leftward
– Market price - rises
– Demand curve facing each firm - shifts
upward
• Economic loses – firms exit until
economic loss = 0
• In the LR, firms earn “normal profit” zero economic profit
5
Perfect Competition and Plant Size
• In LR equilibrium, every firm will select
– Plant size
– Output level
• And
– Operate at minimum point of LRATC
curve
6
Perfect Competition and Plant Size
• Figure 9 Perfect Competition and Plant Size
3. As all firms increase plant size and
output, market price falls to its lowest
possible level . . .
Dollars
LRATC
LRATC
1. With its current plant and ATC curve
the firm earns zero economic profit.
Dollars
MC1
ATC1
d1 = MR1
MC2 ATC
P1
2
E
P*
q1
Output per
Period
2. The firm could earn positive profit
with a larger plant, producing here
d2 = MR2
Output per
Period
4. and all firms earn zero economic
profit and produce at minimum
7
LRATC.
q*
A Summary of the Competitive Firm in the LR
• In long-run equilibrium, the competitive
firm produces Q where:
•
• MC=minimum ATC=minimum LRATC=P
• Consumers are getting the best deal
they could possibly get
8
An Increase in Demand
• Short-run
– Rise in market price
– Rise in market quantity
– Economic profits
• Long-run
– Market equilibrium changes
• The long-run supply curve
– Relationship between market price and
market quantity - after all long-run
adjustments have taken place
9
Constant Cost Industry
• Entry has no effect on input prices
• Industry output has no effect on
individual firms’ cost curves
• Horizontal long-run supply curve
• The industry
– supplies any amount of output demanded
– at an unchanged price
10
Constant-Cost Industry
• Figure 10
A Constant-Cost Industry INITIAL EQUILIBRIUM
Market
Price per
Unit
Firm
Dollars
MC
S1
P1
P1
A
A
ATC
LRATC
d1 = MR1
D1
Q1
Output per
Period
q1
Output per
Period
11
Constant Cost Industry
• Figure 10
Price per
Unit
A Constant Cost Industry NEW EQUILIBRIUM
Market
S1
B
PSR
Firm
Dollars
B
PSR
dSR = MRSR
S2
ATC
LRATC
d1 = MR1
C
P1
SLR
A
P1
MC
A
D2
D1
Q1 QSR
Output per
Q2
Period
q1
qSR
Output per
Period
12
Increasing Cost Industry
• Entry causes input prices to rise
• Each firm’s LRATC curve shifts upward
as industry output increases
• Zero economic profit occurs at a higher
price
• The long-run supply curve slopes
upward
13
Increasing Cost Industry
• Figure 11 An Increasing Cost Industry
Market
Price per
Unit
S1
B
PSR
Firm
Dollars
S2
C
SLR
P2
P2
C
P1
P1
A
A
LRATC2
LRATC1
d2 = MR2
d1 = MR1
D2
D1
Q1
Q2
Output per
Period
q1
Output per
Period
14
Decreasing Cost Industry
• Entry by new firms decreases input
prices
• Each firm’s LRATC curve shifts
downward as industry output increases
• Zero economic profit occurs at a lower
price
• The long-run supply curve slopes
downward
15
Decreasing Cost Industry
• Figure 12 A Decreasing Cost Industry
Market
Price per
Unit
S1
PSR
P1
LRATC1
B
S2
A
P1
C
P2
SLR
D1
Q1
Firm
Dollars
Q2
A
P2
C
d1 = MR1
LRATC2
d2 = MR2
D2
Output per
Period
q1
Output per
Period
16
Market Signals and the Economy
• Market signals
– Price changes - cause changes in
production to match changes in
consumer demand
• Demand increases - price rises
– signals firms to enter the market
– industry output increases
• Demand decreases –price falls
– signals firms to exit the market
– industry output decreases
17
A Change in Technology
• A technological advance
– rightward shift of the market supply curve
– market price decreases
– Short run - economic profit
– Long run - zero economic profit
• Firms that refuse to use the new
technology will not survive.
18
A Change in Technology
• Figure 13 Technological Change in Perfect Competition
Firm
Market
Price per
Bushel
Dollars per
Bushel
S1
LRATC1
S2
$3
LRATC2
d1 = MR1
2
d2= MR
A
$3
B
2
D
Q1
Q2
Bushels
per Day
1000
Bushels
per Day
19
Solar Power: Increasing Cost Industry
• Generating electricity from solar panels
– costs more than twice as much as
generating the same energy from fossil
fuels
• With government help
– by 2006, Germany became the world’s
largest producer of solar energy
• The growth slowed dramatically in early 2006
– even though the subsidies and incentives
remained
• The solar panel industry - increasing cost
20
Solar Power
• Figure 14 The Global Market For Solar Panels
Price
(Dollars
per peak
watt)
S2003
B
$5.00
3.50
Price
(Dollars
per peak
watt)
Market
S2005
Firm
LRATC2005
C
C
$5.00
3.50
A
A
d2 = MR2
LRATC2003
d1 = MR1
D2005
D2003
750
1,750
Quantity of
Solar Panels
(Megawatts)
q1
Quantity of
Solar Panels
(Megawatts)
21
Solar Power
• Figure 15 The Global Market For Polysilicon
Price
per
kilogram
S2003
$70
F
32
E
D2005
D2003
27
Quantity of Polysilicon
(Millions of Kilograms per Year)
22