380 L15-Long Run Competitive Firm Equilibrium

380 L15-Long Run Competitive Firm Equilibrium - Long Run...

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Long Run Competitive Firm Equilibrium R. Pope Short-run competitive equilibrium usually means that the time-period is sufficiently short that incumbent firms don’t change their capital nor are there entrants. However, sometimes, the short-run allows capital to vary. Long-run competitive equilibrium is a sufficiently long time that all capital adjustments can be made including free entry and exit. In the short-run, the industry supply curve is the horizontal sum of firm-level supply curves presumably holding fixed, input prices. Note that shifts in demand trace out this industry supply curve. In the long-run, it is convenient to have both of these notions on hand: industry supply curves which are the horizontal summation of extant firm-level supply curves holding input prices constant and the points of supply traced out by changes in the industry demand curve. This latter concept is the true industry supply. We especially need the demand-tracing concept to talk about a concept called external economies of scale. Market Concepts Industry or market supply is the horizontal summation of N firms supply. Thus if , S i q is the supply of the ith firm, then , 1 N S s i k Q q = = . Example, q S,1 =50+2P S and q S,2 =10+P S , then the industry supply is 60+3P S . If price were 10, then firm one would supply 70 while firm 2 would supply 20 and the market supply is 60+3(10)=90. Likewise, market demand is the horizontal summation of M individual demands, , 1 M D D i j Q q = = . The market elasticity of Demand is , D D D D D Q P D D Q P P Q ε = while the market elasticity of supply is , S S S S Q P S S Q P P Q = . 1. Internal Economies of Scale- These are the scale economies internal to the firm that we discussed under the heading of technology. The classical treatment of the competitive firm has initial scale economies and diseconomies of scale for larger outputs leading to a U-shaped average cost curve in both the short and long run. Question: why would this be an attractive way to look at the world? Entry and Long Run Competitive Equilibrium Supply
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380 L15-Long Run Competitive Firm Equilibrium - Long Run...

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