l10 - EC 1 UCLA Dr. Bresnock Lecture 10 Long Run Price and...

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EC 1 UCLA Dr. Bresnock Lecture 10 Long Run Price and Output Determination : Pure Competition Remember : Firms can alter all inputs, and can “enter” or “exit” the industry if “economic profits” or “economic losses” are present. Assume Initially : (1) “Entry” and “Exit” constitutes the long run adjustment to changing market circumstances. (2) Costs are identical for each firm . This is a simplifying assumption so that we can regard the firm as a “representative firm” of all the other purely competitive firms. (3) Constant-cost industry is assumed for simplicity so that entry and exit will not affect cost schedules of the individual firms nor resource prices. Long Run Equilibrium (Pure Competition) For the purely competitive firm, the long run equilibrium is found at the Q where P = AR = MR = MC = min ATC Thus, entry and exit drive “economic profits” and “economic losses” to zero in the long run. In the long run, all purely competitive firms break even, or just earn “normal profits”. Graph 1 Long Run Equilibrium : Entry (Pure Competition) INDUSTRY F I R M
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EC 1 Lecture 10 Dr. Bresnock Graph 2 Long Run Equilibrium : Exit (Pure Competition) INDUSTRY F I R M Long Run Industry Supply (Pure Competition) (1) Constant Cost Case – entry and exit of firms does not affect: (a) resource prices, or (b) other production costs. Ex. manufacturing industries. Graph 3 Constant Cost Industry
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EC 1 Lecture 10 Dr. Bresnock (2) Increasing Cost Case – entry and exit of firms causes: (a) resource prices to rise when demand increases, and vice versa, and (b) other production costs to rise when demand increases and vice versa. Ex. agriculture, forestry, extractive industries such as minerals, petroleum. Graph 4 Increasing Cost Industry (3) Decreasing Cost Case – entry and exit of firms causes: (a) resource prices to fall when demand increases, and vice versa, and (b) other production costs to fall when demand increases and vice versa. Ex. firms experiencing “economies of scale” in production as a result of volume discounts in purchasing materials, volume shipping discounts, preferred interest rates for borrowing, i.e. “prime rate” Graph 5 Decreasing Cost Industry
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This note was uploaded on 05/20/2010 for the course ECON 180-004-20 taught by Professor Bresnock during the Winter '09 term at UCLA.

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l10 - EC 1 UCLA Dr. Bresnock Lecture 10 Long Run Price and...

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