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CHAPTER Perfect Competition PowerPoint Slides Slides prepared prepared by: by: PowerPoint Andreea CHIRITESCU CHIRITESCU Andreea Eastern Illinois Illinois University University Eastern © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Market Structure • Market structure – All the characteristics of a market that influence how trading takes place • Four basic kinds of market structure – Perfect competition – Monopoly – Monopolistic competition – Oligopoly © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 What Is Perfect Competition? • Competition – A situation of diffuse, impersonal competition in a highly populated environment • Perfect competition 1. Large numbers of buyers and sellers 2. Sellers offer a standardized product 3. Sellers can easily enter into or exit from the market 4. Buyers and sellers are well-informed © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 What Is Perfect Competition? • Large number of buyers and sellers – No individual decision maker can significantly affect the price of the product by changing the quantity it buys or sells • Standardized product offered by sellers – Buyers do not perceive differences between the products of one seller and another © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 What Is Perfect Competition? • Easy entry into and exit from the market – No significant barriers or special costs to discourage new entrants – No barriers to exit • Well-informed buyers and sellers – Buyers and sellers have all information relevant to their decision to buy or sell © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 What Is Perfect Competition? • Is perfect competition realistic? – Yes: the market for wheat – Other markets, one or more of the assumptions of perfect competition will not be met – The model of perfect competition is powerful – Many markets, while not strictly perfectly competitive, come reasonably close © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 The Perfectly Competitive Firm • A perfectly competitive firm – Faces a demand curve that is horizontal (perfectly elastic) at the market price – Price taker • Treats the price of its product as given and beyond its control © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Figure 1 The Competitive Industry and Firm Price per Ounce (a) Market 2. determines the equilibrium market price. Price per Ounce 3. The typical firm can sell all it wants at the market price . . . S $800 (b) Firm d Demand Curve Facing the Firm $800 D 1. The intersection of the market supply and the market demand curves . . . Ounces of Gold per Day 4. so it faces a horizontal demand curve. Ounces of Gold per Day © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 The Perfectly Competitive Firm • Total revenue (TR) curve – Straight line that slopes upward – Slope of the TR curve = the price of output • Marginal revenue (MR) curve – Horizontal line at the market price – MR = the market price – Same as the demand curve facing the firm © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Table 1 Cost and Revenue Data for Small Time Gold Mines © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Figure 2 Profit Maximization in Perfect Competition Dollars TR (a) TC $5,600 4,200 Maximum Profit per Day = $1,400 Slope = 800 1,100 1 Dollars 2 3 4 5 6 7 8 9 10 Output (b) MC d=MR $800 1 2 3 4 5 6 7 8 9 Panel (a) shows a competitive firm’s total revenue (TR) and total cost (TC) curves. TR is a straight line with slope equal to the market price. Profit is maximized at 7 ounces per day, where the vertical distance between TR and TC is greatest. Panel (b) shows that profit is maximized where the marginal cost (MC) curve intersects the marginal revenue (MR) curve, which is also the firm’s demand curve. 10 Output © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 The Perfectly Competitive Firm • Marginal cost (MC) – First falls and then rises • Total cost – Rises first at a decreasing rate and then at an increasing rate • Total profit = TR + TC • Profit-maximizing output – Where the MC curve crosses the MR curve from below © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 The Perfectly Competitive Firm • • • • Profit per unit = P – ATC Firm earns profit: P > ATC Firm suffers a loss: P < ATC Total profit (or loss) – At the best output level – Area of a rectangle • Height = distance between P and ATC • Width = quantity of output © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Figure 3 Measuring Profit or Loss (a) Economic Profit Dollars MC Profit per Ounce ($200) d=MR $800 ATC 600 1 2 3 4 5 6 7 8 9 10 Ounces of Gold per Day The competitive firm in panel (a) produces where marginal cost equals marginal revenue, or 7 units of output per day. Profit per unit at that output level is equal to revenue per unit ($800) minus cost per unit ($600), or $200 per unit. Total profit (indicated by the blue-shaded rectangle) is equal to profit per unit times the number of units sold, $200 × 7 = $1,400. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Figure 3 Measuring Profit or Loss (b) Economic Loss Dollars MC Loss per Ounce ($200) ATC 600 d=MR $400 1 2 3 4 5 6 7 8 9 10 Ounces of Gold per Day In panel (b), we assume that the market price is lower, at $400 per ounce. The best the firm can do is to produce 5 ounces per day and suffer a loss shown by the red area. It loses $200 per ounce on each of those 5 ounces produced, so the total loss is $1,000—the area of the redshaded rectangle. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 The Perfectly Competitive Firm • Shut down if – TR < TVC – P < AVC • Shutdown price – The price at which a firm is indifferent between producing and shutting down © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 The Perfectly Competitive Firm • Firm’s short-run supply curve – A curve that shows the quantity of output a competitive firm will produce at different prices – Is its MC curve for all prices above minimum AVC • For all prices below minimum AVC, the firm will shut down © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Figure 4 Short-Run Supply under Perfect Competition $7 Price per (b) Bushel d1=MR1 $7 5 d2=MR2 5 4 d3=MR3 4 d4=MR4 2 d5=MR5 1 Dollars (a) ATC Firm’s Supply Curve AVC 2 MC 1 1,000 2,000 4,000 7,000 Bushels 5,000 per Year 7,000 2,000 4,000 5,000 Bushels per Year Panel (a) shows a typical competitive firm facing various market prices. For prices between $2 and $7 per bushel, the profit-maximizing quantity is found by sliding along the MC curve. Below $2 per bushel, the firm is better off shutting down, because P < AVC. Panel (b) shows the firm’s supply curve, which is the same as its MC curve for all prices above the shutdown price of $2 per bushel. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 Competitive Markets in the Short Run • In the short run – The number of firms in the industry is fixed • Market supply curve – A curve indicating the quantity of output • That all sellers in a market will produce • At different prices • In the short run – Add up the quantities of output supplied by all firms in the market at each price © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 Figure 5 Deriving the Market Supply Curve Dollars (a) Firm $7 1. At each price . . . Firm’s Supply Curve Price per Bushel $7 (b) Market Market Supply Curve 5 5 AVC 4 4 2 2 1 1 4,000 2,000 5,000 2. the typical firm supplies the profit-maximizing quantity. 7,000 Bushels per Year 400,000 700,000 200,000 500,000 Bushels per Year 3. The total supplied by all firms at different prices is the market supply curve © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 Competitive Markets in the Short Run • Short run equilibrium – Economic profit • If P > ATC – Economic loss • If AVC < P < ATC © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Figure 6 Perfect Competition © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 Figure 7 Short-Run Equilibrium in Perfect Competition Price per Bushel 1. When the demand curve is D1 and market equilibrium is here . . . 2. the typical firm operates here, earning economic profit in the short run. Dollars S MC ATC $7 $7 d1=MR1 Loss per Bushel at p =$4 D1 Profit per Bushel at p =$7 d2=MR2 4 4 D2 400,000 700,000 Bushels per Year 3. If the demand curve shifts to D2 the market equilibrium moves here . . . 4,000 7,000 Bushels per Year 4. and the typical firm operates here, suffering a short-run loss. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 Competitive Markets in the Short Run • Perfect competition – Market • Sums up the buying and selling preferences of individual consumers and producers • Determines the market price – Each buyer and seller • Takes the market price as given • Able to buy or sell the desired quantity © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 Competitive Markets in the Long Run • Long run – New firms can enter a competitive market • Expectations of continued economic profit • Positive economic profit continues to attract new entrants until economic profit is reduced to zero – Existing firms can exit the market • Expectations of continued economic loss • Economic losses continue to cause exit until the losses are reduced to zero © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 Competitive Markets in the Long Run • Entry into a market – Entirely new firm enters a market – An existing firm adds a new product line – An existing firm creates a new branch (local market) • Exit from a market – Going out of business – A firm switches out of a particular product line, even as it continues to produce other things © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 Competitive Markets in the Long Run • Short-run profit to long-run equilibrium – Short-run equilibrium • Economic profit, P > ATC – Long-run: attract new entrants • Market supply curve shifts rightward – Market price falls – Horizontal demand curve facing each firm shifts downward – Each firm will slide down its marginal cost curve, decreasing output • Until each firm is earning zero economic profit © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 Figure 8 From Short-Run Profit to Long-Run Equilibrium (a, b) Price per Bushel Dollars MC S1 ATC A A $9 $9 d1 D so each firm earns an economic profit. 900,000 With initial supply curve S1, market price is $9 . . . Bushels per Year 5,000 9,000 Bushels per Year © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Figure 8 From Short-Run Profit to Long-Run Equilibrium (c, d) Price per Bushel Dollars MC S1 ATC A S2 A $9 $9 E d1 E 5 5 d2 D 900,000 1,200,000 Profit attracts entry, shifting the supply curve rightward . . . Bushels per Year 5,000 9,000 Bushels per Year until market price falls to $5 and each firm earns zero economic profit. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 Competitive Markets in the Long Run • Short-run loss to long-run equilibrium – Short-run equilibrium • Economic loss, P < ATC – Long-run: firms exit the market • Until each firm is earning zero economic profit • Zero economic profit (Normal profit) – Just enough accounting profit to cover implicit costs – Not the same as zero accounting profit © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 Competitive Markets in the Long Run • Perfect competition and plant size – Long-run equilibrium: plant and output level that bring it to the bottom of its LRATC curve • In long-run equilibrium – The competitive firm operates where: MC = minimum ATC = minimum LRATC = P © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31 Figure 9 Perfect Competition and Plant Size Dollars Dollars MC1 ATC1 3. As all firms increase plant size and output, market price falls to its lowest possible level . . . LRATC LRATC d1=MR1 P1 MC2 ATC2 E P* d2=MR2 2. But the firm could earn positive profit with a larger plant, producing here. q1 Output Per Period 1. With its current plant and ATC curve, this firm earns zero economic profit. q* Output Per Period 4. and each earns zero economic profit, producing at minimum LRATC. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32 What Happens When Things Change? • Initial long-run equilibrium and market demand curve shifts rightward – Short-run • A rise in market price • A rise in market quantity • A rise in economic profits – Long-run: entry of new firms • Market supply shifts rightward • Drives down the price • Economic profit is eliminated © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33 What Happens When Things Change? • Constant cost industry – An industry in which the long-run supply curve is horizontal • Each firm’s cost curves are unaffected by changes in industry output • Long-run supply curve – A curve indicating price and quantity combinations in an industry – After all long-run adjustments have taken place © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34 What Happens When Things Change? • In a constant cost industry – In which industry output has no effect on individual firms’ cost curves – The long-run supply curve is horizontal – In the long-run, the industry will supply any amount of output demanded at an unchanged price © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35 Figure 10 A Constant Cost Industry (a, b) Dollars Dollars (b) (a) MC S1 ATC LRATC A A P1 P1 d1=MR1 D1 Q1 Output per period q1 Output per period At point A in panel (a), the market is in long-run equilibrium. The typical firm in panel (b) operates at the minimum of its ATC and LRATC curves, and earns zero economic profit. The lower panels show what happens if demand increases. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36 Figure 10 A Constant Cost Industry (c, d) Dollars Dollars (c) (d) MC S1 S2 B PSR B PSR A A C SLR P1 P1 ATC dSR=MRSR LRATC d1=MR1 D2 D1 Q1 QSR Q2 Output per period q1 qSR Output per period In the short run, the market reaches a new equilibrium at point B in panel (c), and the typical firm in panel (d) earns economic profit at the higher price PSR. In the long run, profit attracts entry, increasing market supply and lowering price. Entry continues until economic profit at the typical firm in panel (d) is reduced to zero, which requires the price to drop to P1, its original level. In panel (d), the typical firm returns to point A, and in panel (c), the new long-run market equilibrium is point C. The increase in demand raises output, but leaves price unchanged, as shown by the horizontal long-run supply curve connecting points A and C. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 37 What Happens When Things Change? • Increasing cost industry – An industry in which the long-run supply curve slopes upward • Each firm’s LRATC curve shifts upward as industry output increases • In an increasing cost industry – A rise in industry output shifts up each firm’s LRATC curve, so that zero economic profit occurs at a higher price – The long-run supply curve slopes upward © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38 Figure 11 An Increasing Cost Industry Dollars Dollars (a) Market (b) Firm S1 S2 LRATC2 B PSR P2 P1 C LRATC1 SLR C d2=MR2 P2 P1 A d1=MR1 A D2 D1 Q1 Q2 Output per period q1 Output per period Point A in both panels shows the initial long-run market equilibrium, with the typical firm earning zero economic profit. After demand increases, the market reaches a new short-run equilibrium at point B in panel (a). At the higher price, the typical firm earns economic profit (not shown). In the long run, profit attracts entry, supply increases and price begins to fall. But in an increasing cost industry, the rise in industry output also causes costs to rise, shifting up the LRATC curve. In the final, long-run market equilibrium (point C in both panels), price at P2 is higher than originally, and the typical firm once again earns zero economic profit. The increase in demand raises both output and price, as shown [in panel (a)] by the upward-sloping long-run supply curve. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 39 What Happens When Things Change? • Decreasing cost industry – An industry in which the long-run supply curve slopes downward • Each firm’s LRATC curve shifts downward as industry output increases • In a decreasing cost industry – A rise in industry output shifts down each firm’s LRATC curve, so that zero economic profit occurs at a lower price – Long-run supply curve slopes downward © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40 Figure 12 A Decreasing Cost Industry Dollars Dollars (a) Market (b) Firm S1 B LRATC1 PSR LRATC2 S2 A A P1 P1 C P2 SLR d1=MR1 P2 D2 d2=MR2 C D1 Q1 Q2 Output per period q1 Output per period Point A in both panels shows the initial long-run market equilibrium, with the typical firm earning zero economic profit. After demand increases, the market reaches a new short-run equilibrium at point B in panel (a). At the higher price, the typical firm earns economic profit (not shown). In the long run, profit attracts entry, supply increases, and price begins to fall. But in a decreasing cost industry, the rise in industry output causes costs to fall, shifting down the LRATC curve. In the final, long-run market equilibrium (point C in both panels), price at P2 is lower than originally, and the typical firm once again earns zero economic profit. The increase in demand raises output but lowers price, as shown [in panel (a)] by the downward-sloping long-run supply curve. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41 What Happens When Things Change? • As demand increases or decreases in a market – Prices change: act as signals for firms to enter or exit an industry • When demand increases – Price tends to initially overshoot its longrun equilibrium value • Sizable temporary profits for existing firms • Pulls new firms into the market • Increase industry output © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 42 What Happens When Things Change? • When demand decreases – Price falls below its long-run equilibrium value • Sizable losses for existing firms • Drive existing firms out of the market • Decrease industry output • Market signals – Price changes that cause changes in production to match changes in consumer demand © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43 Figure 13 How a Change in Demand Reallocates Resources Price Per Bottle S1 B P2 A C P1 D1 Quantity Of Other Goods Q1 Q2 Q3 A B C Q1 Q2 Q3 In the upper panel, an increased desire for bottled water shifts the S2 market demand curve rightward, from D1 to D2. Price and quantity rise in the short run, and we move from A to B along short-run supply curve S1. The lower panel shows the corresponding short-run movement from A to B along the economy’s PPF: Greater production of bottled water, less D2 production of other things. In the long run, the higher price creates Quantity of Bottled Water economic profit, attracting new firms, and shifting the supply curve rightward (upper panel). Price falls and quantity rises further. In the Production figure, we assume bottled water is an increasing cost industry, so possibilities entry brings the price down to P3, frontier at point C, which is higher than the original price. In the lower panel, the further long-run increase in bottled water production moves us Quantity of Bottled Water along the PPF, from B to C. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 44 What Happens When Things Change? • Technological advance – Rightward shift of the market supply curve – Decreasing market price – In the short run • Early adopters may enjoy economic profit – In the long run • All adopters will earn zero economic profit – Firms that refuse to use the new technology will not survive © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45 Figure 14 Technological Change in Perfect Competition Price per Installed Watt (a) Market Dollars per Installed Watt S1 (b) Firm LRATC1 S2 LRATC2 A $9.50 $9.50 d1=MR1 B 7 7 d2=MR2 D Q1 Q2 Watts Installed per Month q1 Watts Installed per Month Technological change may reduce LRATC. In panel (b), the first solar panel firms to adopt new, costsaving technologies earn economic profit in the short run, because they can initially sell at the old market price of $9.50 per installed watt. That profit leads its competitors to adopt the same technology and attracts new entrants. As market supply increases, price falls until it reaches $7 per installed watt, and each firm is once again earning zero economic profit. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46 Real Estate Agents and the Zero-Profit Result • Markets in which entry and exit do not affect the market price – The zero-profit result still holds: with a twist – In these markets, instead of prices, costs adjust to eliminate economic profit and loss © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 47 Real Estate Agents and the Zero-Profit Result • Real estate agent (seller) – Commission = 3% of the price • Horizontal MR curve – Costs • Office space, transportation, a computer • Agent’s time: showing homes to finicky buyers, negotiating with buyers’ agents • MC curve slopes upward © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 48 Real Estate Agents and the Zero-Profit Result • Profit-maximizing agent – Increase the number of homes sold until MC = MR – Earns zero economic profit • Long-run equilibrium © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 49 Real Estate Agents and the Zero-Profit Result • An increase in the price of homes – Higher dollar commission – Economic profit in the short run – Long-run: more real-estate agents • Higher MC cost curve • Zero economic profit © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 50 Figure 15 After Commissions Rise, Long-Run Profit Returns to Zero Commission per Sale (a) (b) Commission per Sale MC2 MC1 B $12,000 d2=MR2 ATC2 C B $12,000 ATC1 $6,000 A A $6,000 15 Number of Homes Sold per Year d2=MR2 ATC1 d1=MR1 10 MC1 d1=MR1 5 10 15 Number of Homes Sold per Year © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 51 Figure 16 Membership in National Association of Realtors © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 52