Lrcomp - COMPETITION IN THE COMPETITION LONG-RUN LONG-RUN In the short-run the number of firms in a competitive industry is fixed In the long-run

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slide 1 Competition in the long-run In the short-run the number of firms in a competitive industry is fixed. In the long-run new firms can enter or existing firms can leave a competitive industry. COMPETITION IN THE COMPETITION IN THE LONG-RUN LONG-RUN
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slide 2 Competition in the long-run The key to understanding when new firms will want to come into an industry, or existing firms leave, lies in role of profits. Because profits are the difference between revenue and opportunity cost , the existence of profit means a firm is earning more on its invested resources than it could get in its next best alternative.
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slide 3 Competition in the long-run On the other hand, if a firm earns losses (negative profits) then it can earn more on its invested resources in some alternative use.
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slide 4 Competition in the long-run If the typical firm in an industry is earning economic profit, then this provides an incentive for other firms to come into the industry to take advantage of the opportunity. If the best a typical firm in an industry can do is earn losses, then that firm has a strong incentive to leave the industry. The objective here is to see what happens to a market when this sort of entry and exit is possible.
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slide 5 Competition in the long-run Typical firm Industry PIZZA MARKET $/q $/Q q Q LRAC S (500 firms) D Q’ The pizza market is in short-run equilibrium at a price p’. There are currently 500 firms, and the typical pizza firm can make economic profits. p’ q’ mc The question to answer here is what will happen in the long-run, that is, when new firms can come into the industry.
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Competition in the long-run Typical firm Industry PIZZA MARKET $/q $/Q q Q LRAC S (500 firms) D Q’ p’ q’ mc S (700 firms)
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This note was uploaded on 01/05/2012 for the course ECON 201 taught by Professor Brown during the Winter '12 term at BYU.

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Lrcomp - COMPETITION IN THE COMPETITION LONG-RUN LONG-RUN In the short-run the number of firms in a competitive industry is fixed In the long-run

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