Lecture 10

Lecture 10 - EC 1 UCLA Dr Bresnock Lecture 10 Long Run Price and Output Determination Pure Competition Remember Firms can alter all inputs and

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
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. When ATC = AVC, it is then abbreviated to AC when talking about long run 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. 3, Also assumed in the competition module 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) Initially 100 firms INDUSTRY representative FIRM MC S1 S2 AC MR2 MR1 D2 D - total economic profit, which will attract firms, therefore more firms entered –
Background image of page 1

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

View Full DocumentRight Arrow Icon
EC 1 Lecture 10 Dr. Bresnock Red part of MR1 line – long run supply curve (horizontal line) Graph 2 Long Run Equilibrium : Exit (Pure Competition) INDUSTRY FIRM MC S2 AC S1 MR1 D1 MR2 D2 - economic loss (firms that cannot make it will leave the industry) - industry contraction, firms leave the industry 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 S LR D2 D3 D1 If D increases, then no change in P and increase in quantity If D decreases, then no change in P and decrease in quantity
Background image of page 2
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
Background image of page 3

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

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/05/2011 for the course ECON 1 taught by Professor Nagata during the Spring '08 term at UCLA.

Page1 / 8

Lecture 10 - EC 1 UCLA Dr Bresnock Lecture 10 Long Run Price and Output Determination Pure Competition Remember Firms can alter all inputs and

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online