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ECO2201_Slides_6.3 Perfect Comp LR.pdf

ECO2201_Slides_6.3 Perfect Comp LR.pdf - Sorakom(Baltic...

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Sorakom (Baltic) Ngamdecho Department of Business Economics ECO 2201 Microeconomics Lesson 6.3 Perfect Competition in the Long Run 1 Sorakom (Baltic) Ngamdecho Department of Business Economics Perfect Competition in the Long Run ECO 2201 Lesson 6.3 1. Introduction 2. Long Run Equilibrium ì Assumptions ì Adjustment Process to Reach Long-Run Equilibrium 3. Long Run Supply Curve ì Constant-cost Industry ì Increasing-cost Industry ì Decreasing-cost Industry 4. Pure Competition and Efficiency ì Two Efficiency Concept ì Market Failure 5. Dynamic Adjustments 6. Efficiency Gains from Entry Review & Exercises Road Map 1
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Sorakom (Baltic) Ngamdecho Department of Business Economics ECO 2201 Microeconomics Lesson 6.3 Perfect Competition in the Long Run 2 1. Introduction ì Short Run Limitation ì Time is too short to ì Build new factories ì Permanently close down factories (can only shut down temporarily). ì Therefore, existing firms have fixed factory size . ì They cannot change production capacity by building new factories. ì Number of firms in the industry is also fixed . ì New firms cannot enter the industry. ì Existing firms cannot exit the industry by permanently close down. 2 ì Long Run Flexibility ì Time is long enough to change production capacity permanently. ì Firms can build new factories (e.g. Emquartier was recently built). ì Firms can permanently closed down factories (e.g. Daimaru Department Store chain left Thailand). ì Firms can enter or exit the industry. ì No barriers to entry and exit for pure competition. ì Thus, the number of firms can change in the long run (from entry and exit). 1. Introduction 3
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Sorakom (Baltic) Ngamdecho Department of Business Economics ECO 2201 Microeconomics Lesson 6.3 Perfect Competition in the Long Run 3 2. Long Run Equilibrium ì Assumptions 1. Easy to enter and exit the industry ì Entry and exit are the only long run adjustment we consider. 2. All firms have identical costs. ì Firms will all make the same production decisions since they also all face the same market price 3. Constant-cost industry ì Entry and exit do not affect resource prices. ì Remark : We use short-run market supply curve in this analysis. ì The long-run market supply will be discussed in topic number 3. 4 ì Adjustment Process to Reach Long-Run Equilibrium 1. Entry eliminates profits 2. Exit eliminates losses ì Therefore, long run equilibrium is where everyone breaks even . ì Remarks: ì Zero economic profits is the only possible outcome in the long run for perfectly competitive firms. ì Firms make some money, but not beyond normal profits. ì Note that in other market structures, firms may make positive economic profits. 2. Long Run Equilibrium 5
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Sorakom (Baltic) Ngamdecho Department of Business Economics ECO 2201 Microeconomics Lesson 6.3 Perfect Competition in the Long Run 4 ì Adjustment Process to Reach Long-Run Equilibrium 1.
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