Class03_21 - 21/03/2008 Class Notes (cover part of Chapter...

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21/03/2008 Class Notes (cover part of Chapter 10 in the textbook) Class Outline Perfect Competition and Long-run Equilibrium Perfect Competition and Efficiency Perfect Competition and Long-run Equilibrium Consider a short run equilibrium where firms earn positive profits, i.e., TR > TC If profits are positive (area in green in the right graph) other firms will enter the market supply increases the equilibrium price decreases and the output of the existing firms decrease Profits decrease until they disappear! In the Long-run Profits=0 when firms max profits MR=MC= p*=ATC=min ATC If profits are negative firms exit the market supply increases p* increases and the output of the existing firms also increases this occurs until when profits are null Market M Firm F q q’ S’ S D P’ P* 1
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Adjustment to a new long-run equilibrium Case 1. “Constant Cost” Industry Consider the market for wheat. Initially the market is in equilibrium at point 1. Looking at the RHS graph firms are making zero profits: 1 is a long-run equilibrium! Now, suppose that there is an increase in demand. The market price increases at P’. Firms
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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University.

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Class03_21 - 21/03/2008 Class Notes (cover part of Chapter...

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