Lecture14 - Lecture#14 Perfect Competition in the Long Run the long run output decision is the long run close down decision is the long run close

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Lecture #14 Perfect Competition in the Long Run the long run output decision is LRMC = MR = P the long run close down decision is: P < min LRAVC then the firm will shut down if P < min LRAVC then the firm will shut down. The Long Run Industry Supply Curve Consider an industry which is in its long run equilibrium. Suddenly, consumer’s demand for the industry’s product increases so that the market demand curve shifts to the right. Most perfectly competitive industries will respond to this extra demand by expanding output, however some industries will do so without altering their price, some will raise their price, and other industries will respond by lowering their price. Which of these pricing decisions a particular industry will make is determined by the nature of the input costs for the specific industry under consideration.
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Let’s consider all three scenarios… hape of LR Supply Curve Shape of LR Supply Curve D Costs unchanged Constant Cost Industry Horizontal Costs rise Increasing Cost Industry Upward Sloping Costs fall Decreasing Cost Industry Downward Sloping Now, remember that the market (or industry) supply curve in the long run is simply the orizontal summation of the long run supply curves of the individual firms horizontal summation of the long run supply curves of the individual firms. 1. Constant Factor Costs: The Constant Cost Industry (CCI) P S S’ C, P P B LRMC LRAC D D’ AC LRS (CCI) X X “Representative Firm” “Industry or Market”
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The shift in demand from D to D’ raises price from the equilibrium A to the short run equilibrium point B. At a higher price, firms that were making “normal profits” are now making positive economic gp, g p g p profits. These economic profits will attract entry by new firms into the industry whose additional output serves to shift the industry supply to the right. As a result, the price falls (as do the positive economic profits) until equilibrium is reached again (after the “long run adjustment”) at point C. Once the “long run adjustments” take place, the long run supply curve is horizontal when we connect the initial long run equilibrium at A with the new long run equilibrium at C. The key to this result is that the MC and LRAC curves do not shift because we are considering firms the case of a constant cost industry and presumably the firm’s costs remain the same when this in the case of a constant cost industry and presumably, the firm s costs remain the same when this industry expands. 2. Increasing Factor Costs: The Increasing Cost Industry (ICI) P S S’ LRS (ICI) RMC’ C, P P C B LRMC LRAC LRMC LRAC’ D D’ A X X “Representative Firm” “Industry or Market”
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C, P P S S’ B LRS (ICI) RMC LRMC’ LRAC’ C LRMC LRAC D D’ A X X “Representative Firm” “Industry or Market” ome industries experience rising costs as they expand output in response to higher Some industries experience rising costs as they expand output in response to higher demand.
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This note was uploaded on 03/31/2011 for the course ECON 201 taught by Professor Vandewaal during the Fall '09 term at Waterloo.

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Lecture14 - Lecture#14 Perfect Competition in the Long Run the long run output decision is the long run close down decision is the long run close

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