This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ncing
A permanent decrease in demand changes
the long-run equilibrium:
– in the short run: price falls; quantity supplied
decreases; firms incur economic loss…
– in the long run: firms exit, price rises to
original level; remaining firms earn zero
economic profits, but fewer firms in industry. A Decrease in Demand
Price and Cost Price S1 Firm
S0 P0 ATC MR0 P0 P1 MC P1 MR1 D0
0 Q2 Q1 Q0 Quantity q1 q0 Quantity External Economies
External economies are factors beyond the
control of an individual firm that lower its
costs as the industry output increases.
External diseconomies are factors outside
the control of a firm that raise the firm’s
costs as industry output increases. Technological Change
Implementing new cost-saving production
techniques generally requires firms to invest in
new plant and equipment. This takes time.
The cost curves of firms adopting the new technology shift
downward. The industry supply curve shifts rightward;
quantity increases and price falls.
Firms adopting the new technology make an economic
profit. This draws in new technology firms; old
technology firms exit.
Eventually reach a new long-run equilibrium: zero
economic profit. Price Efficiency of Competition
surplus Efficient allocation * C0 Producer
Q0 Q* Quantity Efficiency of Perfect
There are three main obstacles to efficiency:
– Public goods
– External costs and external benefits...
View Full Document
- Fall '14
- Perfect Competition