Download Long Run Equilibrium in Perfect Competition

YOU must draw 2 graphs for competitive markets
In a Competitive Market:
MARKET DEMAND:
Markets finds equilibrium
through Supply & Demand
LONG RUN:
Firms Enter market if:
Firms Exit market if:
P > ATC
P < ATC
SHORT RUN:
Firms Shutdown if:
Firms remain open if:
Entire Market
P < AVC
P > AVC
Individual Firm
Price
Price
MC
Short-run supply, S1
ATC
AVC
A
P1
P1
Demand, D1
0
Q1
Quantity (market)
0
Quantity (firm)
Long Run Equilibrium
Market
Individual Firm
Price
Price
MC
Short-run supply, S1
ATC
AVC
A
P1
P1
Demand, D1
0
Q1
Quantity (market)
0
Must produce at Efficient Scale
Economic profit = ZERO
P = MC = ATC = MR
Quantity (firm)
Short Run Increase in Demand
This can not be a long term equilibrium!
Market
Firm
Price
Price
B
P2
P1
MC
S1
P2
A
Long-run
supply
P1
Quantity (market)
0
ATC
AVC
D2
D1
0
Q1
Q2
Quantity (firm)
Long Run Impact
Profits induce entry and market supply increases
Entry/Exit is a
Long run concept!
Market
Firm
Price
Price
S1
B
P2
A
C
P1
S2
Long-run
supply
MC
ATC
AVC
P1
D2
D1
0
Q1
Q2
Q3
Quantity (firm)
The increase in supply lowers market price.
0
Quantity (market)
In the long run market
price is restored, but
market supply is greater.
Last Details….
• Market long run supply curve is perfectly elastic because of
unlimited entry/exit into the marketplace at minimum of ATC
• Short Run supply curve is upward sloping
– Above AVC curve