L13 - Economics 101:Principles of Microeconomics Lecture 13...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 13: Long-run competitive market equilibrium continued Producer input choices and their results for the economy Factor distribution of income: the marginal productivity theory of labor Wage disparities
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2 Recap: short-run & long-run industry supply The long-run industry supply curve is always flatter— more elastic —than the short-run industry supply curve. More things are possible in the long run – mainly entry and exit , (adjusting FC) The LR industry supply shows quantity supplied at any given price when there is no more incentive for entry or exit Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition
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3 Long-run market equilibrium In a long-run market equilibrium , quantity demanded equals quantity supplied and there is no further incentive for entry and exit This happens when the short-run equilibrium coincides with the LRE point. q p short-run industry supply long-run industry supply market demand p q We have reached the LRME when the short-run industry supply has moved to the long-run equilibrium point. Definition Definition Definition Definition Definition Definition Definition Definition
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4 The long-run industry supply when  firms are identical in cost (standard  case) Farming, transportation, raw materials, ... When firms have identical cost functions, they have the same break-even price (and the same short-run supply curve) q p ATC short-run firm supply curve break-even price
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5 Long-run market supply with  identical firms (2) In the long run , the number of producers is endogenous: as long as positive profits exist, firms will enter the industry, shifting supply to the right q p break-even price short-run industry supply market demand p In the long run, any quantity will be supplied at the break-even price (at this price, all profits are zero – no incentives for entry or exit) p’
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6 Long-run market supply with  identical firms (3) In the long run , any quantity will be supplied at the break- even price: The long-run industry supply is perfectly elastic at the break- even price (with identical firms) q p break-even price market demand long-run industry supply long-run equilibrium quantity
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7 Long-run market supply with non- identical firms The long-run industry supply slopes upward if firms are not identical firms are competing for a (very) scarce input In this case, only the last firm to enter the market at that price makes zero profit q p short-run industry supply long-run industry supply
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