LECTURE 16

LECTURE 16 - Lecture 16 1. Long Run Competitive...

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Lecture 16 1. Long Run Competitive Equilibrium. a. This occurs when there is no incentive for profit maximizing firms to enter or leave the industry. b. Assuming identical firms, this means that each firm produces when P=MC=AC. At this point profits are zero. Each firm is producing at the minimum point of its long run average cost curve. Show graph. c. With identical firms and no externalities, the long run industry supply curve will be a horizontal line though the short run supply curve will be upward sloping. d. Show graphically how a shift in the demand curve will affect prices and quantity in the short run. The short run supply curve will then shift until the price is again on the long run supply curve. e. In long run equilibrium, the price is driven entire by the minimum cost of production. This in turn is driven by factor prices and technology. 2. Heterogeneous Firms. a. If there are heterogeneous firms, some firms will earn profits even in the long run. The prices will be set by the least efficient firm (marginal firm) that finds it optimal to produce. Draw graph. b. This heterogeneity comes when there is a scarce factor that cannot be readily produced. For example, the number of good bogs suited for the production of
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LECTURE 16 - Lecture 16 1. Long Run Competitive...

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