e100_winter2010_lecture11_topost

e100_winter2010_lecture11_topost - Short-run Perfectly...

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Short-run Perfectly Competitive Equilibrium • All firms produce where P = MC (if P > AVC) • Market supply = market demand • BUT, positive profits will encourage new firms to enter
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• Positive profits imply that resources used in this industry are earning more than could be earned in any alternative use
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• This will encourage new firms to enter the industry (to earn these profits) • Entry will affect the industry supply curve • Equilibrium price will fall
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S 0 D S 1
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When does entry of new firms stop? • As price falls, profits in the industry are reduced • Only when profits are driven to zero, will there no longer be an incentive to enter
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Profit = AR*Q – AC*Q = P*Q – AC*Q P Q MC ATC AVC P M
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Profit = AR*Q – AC*Q = P*Q – AC*Q P Q MC ATC AVC P’ M P M
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Eventually Profits=0 P Q MC ATC AVC P M P’ M
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Why do firms produce at zero profits • Recall profits = difference between total costs and total revenues • Costs include the change in value of all resources used in production (opportunity costs also) • At zero (economic) profits, all of these costs are being covered
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What if firms earn negative profits in short-run? • Negative profits produce incentive to leave the industry • Put inputs to use in different productive activities • Exit will also affect the industry supply curve (shift S left) – P increases
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S 0 D S 1
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Long-run Perfectly Competitive Equilibrium • All firms are producing where P = MC • No pressure for additional entry or exit (zero profits) or P = MC = ATC • Firms must have no incentive to change production levels
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This note was uploaded on 02/27/2010 for the course ECN 40279 taught by Professor Annstevens during the Spring '10 term at UC Davis.

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e100_winter2010_lecture11_topost - Short-run Perfectly...

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