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Unformatted text preview: lowered the price and eliminated the economic
profit. So IBM now concentrates on servers and
other parts of the computer market.
IBM exited the PC market because it was incurring economic losses. Its exit decreased market supply and made it possible for the remaining firms in
the market to make zero economic profit. Long-Run Equilibrium
You’ve now seen how economic profit induces entry,
which in turn eliminates the profit. You’ve also seen
how economic loss induces exit, which in turn eliminates the loss.
When economic profit and economic loss have
been eliminated and entry and exit have stopped, a
competitive market is in long-run equilibrium.
You’ve seen how a competitive market adjusts
toward its long-run equilibrium. But a competitive
market is rarely in a state of long-run equilibrium.
Instead, it is constantly and restlessly evolving toward
long-run equilibrium. The reason is that the market
is constantly bombarded with events that change the
constraints that firms face. 207 International Harvester, a manufacturer of farm
equipment, provides another example of exit. For
decades, people associated the name “International
Harvester” with tractors, combines, and other farm
machines. But International Harvester wasn’t the
only maker of farm equipment. The market became
intensely competitive, and the firm began to incur
economic losses. Now the firm has a new name,
Navistar International, and it doesn’t make tractors
any more. After years of economic losses and shrinking revenues, it got out of the farm-machine business
in 1985 and started to make trucks.
International Harvester exited because it was
incurring an economic loss. Its exit decreased supply
and made it possible for the remaining firms in the
market to break even. Markets are constantly adjusting to keep up with
changes in tastes, which change demand, and changes
in technology, which change costs.
In the next sections, we’re going to see how a
competitive market reacts to changing tastes and
technology and how it guides resources to their highest-valued use. REVIEW QUIZ
2 What triggers entry in a competitive market?
Describe the process that ends further entry.
What triggers exit in a competitive market?
Describe the process that ends further exit. You can work these questions in Study
Plan 10.4 and get instant feedback. 000200010270728684_CH10_p195-220.qxd 208 6/23/11 4:13 PM Page 208 CHAPTER 10 Perfect Competition x Changing Tastes and Advancing Technology Increased awareness of the health hazards of smoking
has decreased the demand for tobacco products. The
development of inexpensive automobile and air
transportation during the 1990s decreased the
demand for long-distance trains and buses. Solidstate electronics has decreased the demand for TV
and radio repair. The development of good-quality
inexpensive clothing has decreased the demand for
sewing machines. What happens in a competitive
market when there is a permanent decrease in the
demand for its product?
Microwave food preparation has increased the
demand for paper, glass, and plastic cooking utensils
and for plastic wrap. The Internet has increased the
demand for personal computers and the widespread
use of computers has increased the demand for highspeed connections and music downloads. What happens in a competitive market when the demand for
its output increases?
Advances in technology are constantly lowering
the costs of production. New biotechnologies have
dramatically lowered the costs of producing many
food and pharmaceutical products. New electronic
technologies have lowered the cost of producing just
about every good and service. What happens in a
competitive market for a good when technological
change lowers its production costs?
Let’s use the theory of perfect competition to
answer these questions. A Permanent Change in Demand
Figure 10.10(a) shows a competitive market that initially is in long-run equilibrium. The demand curve
is D0, the supply curve is S0, the market price is P0,
and market output is Q0. Figure 10.10(b) shows a
single firm in this initial long-run equilibrium. The
firm produces q0 and makes zero economic profit.
Now suppose that demand decreases and the
demand curve shifts leftward to D1, as shown in Fig.
10.10(a). The market price falls to P1, and the quantity supplied by the market decreases from Q0 to Q1
as the market moves down along its short-run supply
curve S0. Figure 10.10(b) shows the situation facing a
firm. The market price is now below the firm’s minimum average total cost, so the firm incurs an eco- nomic loss. But to minimize its loss, the firm adjusts
its output to keep marginal cost equal to price. At a
price of P1, each firm produces an output of q1.
The market is now in short-run equilibrium but
not long-run equilibrium. It is in short-run equilibrium because each firm is maximizing profit; it is not
in long-run equilibrium because each firm is incurring an economic loss—its average total cost exceeds
The economic loss is a signal for some firms to
exit the market. As they do so, short-run mar...
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