{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture14 - Lecture#14 Perfect Competition in the Long Run...

Info icon This preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture #14 Perfect Competition in the Long Run the long run output decision is LRMC = MR = P • the long run close down decision is: if P < min LRAVC then the firm will shut down the long run close down decision is: if P < min LRAVC then the firm will shut down. The Long Run Industry Supply Curve C id i d t hi h i i it l ilib i S dd l d d 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. M t f tl titi i d t i ill d t thi t d d b di 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.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Let’s consider all three scenarios… 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 horizontal 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) C P P S S’ C, P B LRMC LRAC D D’ A C LRS (CCI) X X “Representative Firm” “Industry or Market”
Image of page 2
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 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 in 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) C P P S S’ B LRS (ICI) LRMC’ LRAC’ C, P C LRMC LRAC LRMC D D’ A X X “Representative Firm” “Industry or Market”
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
C, P P S S’ B LRS (ICI) LRMC LRMC’ LRAC’ A C LRAC D D’ X X “Representative Firm” “Industry or Market” Some industries experience rising costs as they expand output in response to higher
Image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern