Survey
* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project
Download Lecture8(Ch9)
Document related concepts
no text concepts found
Transcript
Examples of rising and falling industries • • • • • • Beef chicken bagel stores smoothies video rental stores drive-in movies Long Run vs. Short Run in an Industry • Long run for an industry – Firms have either entered or exited the industry • Short run for an industry – Firms have neither entered nor exited the industry • Contrast: long run vs. short run for a firm – Long run: can adjust all inputs – Short run: can adjust some but not all inputs The Long Run Competitive Equilibrium Model • It’s Dynamic! • It has three key ingredients – Two we have seen before – The third is new (1) Each firm has the typical MC, ATC, AVC graph 08_05 DOLLARS MC ATC AVC QUANTITY (2) Each firm is competitive, and the Market demand curve is downward sloping 09_05 PRICE PRICE Demand curve from the perspective of a typical firm Market demand curve Demand Price is constant because the single seller cannot affect the price. Demand QUANTITY PRODUCED BY SINGLE FIRM Single Firm QUANTITY PRODUCED BY ALL FIRMS IN THE MARKET Market (3) Free entry and exit • Firms can enter the industry or exit the industry – firms exit the industry if profits are negative (losses) – firms enter the industry if profits are positive • Note that the definition of profits is economic profits – Opportunity costs are part of total costs The Typical Firm and the Market 09_06 PRICE PRICE Supply MC ATC Market price determined by intersection P Zero profit because P = ATC Firm produces this amount. Demand FIRM QUANTITY Typical Firm MARKET QUANTITY Market What happens if there is an increase in demand? • First, look at short run effects • Then, look at what happens over time as firms enter or exit • Finally, check out the new long run equilibrium Now let’s do it by hand to see how the curves change over time Using the Model to explain the real world. Consider an example: 09_03 PRICE (DOLLARS PER TON) Price of grapes 700 500 300 100 1986 1988 1990 09_04 NUMBER OF ACRES 4,000 New vineyards 3,000 2,000 1,000 1985 1986 1987 1988 1989 1990 1991 Now consider a decrease in demand – Short run effects – dynamics over time – new long run equilibrium • Another nice feature of competitive markets • Since profits are zero in long run equilibrium, P = ATC • Thus, in long run industry equilibrium ATC is at a minimum • In other words, cost per unit is a low as you can go What if there is a shift in costs? Shift down both the ATC and the MC curves Watch what happens External Economies of Scale • When a whole industry expands, the firms’ costs may shift down even though the scale at each firm does not expand • Contrast with (internal) economies of scale at a single firm To illustrate external economies of scale shift both the demand curve and the cost curves. Let’s look at a hand sketch again: Look more carefully at market supply and demand 09_11 PRICE Short-run industry supply curves S1 S2 S3 Long-run industry supply curve D1 D2 D3 QUANTITY Market Can also have external diseconomies of scale 09_10 PRICE Short-run industry supply curves S1 S2 S3 Long-run industry supply curve D1 D2 D3 QUANTITY Market
Related documents