Chapter 11 Pure  Compe**on  in  the  Long  Run  

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11-­‐2  

The Long Run in Pure Competition

•  In  the  long-­‐run  •  Firms  can  expand  or  contract  capacity  •  Firms  can  enter  or  exit  the  industry  

LO1  

11-­‐3  

Profit Maximization in the Long Run

•  Easy  entry  and  exit  •  The  only  long-­‐run  adjustment  we  consider  

•  Iden*cal  costs  •  All  firms  in  the  industry  have  iden*cal  costs  

•  Constant-­‐cost  industry  •  Entry  and  exit  of  firms  do  not  affect  resource  prices  

LO1  

11-­‐4  

Long Run Adjustment Process

•  Adjustment  process  in  pure  compe**on  •  Firms  seek  profits  and  shun  losses  •  Firms  are  free  to  enter  or  to  exit  •  Produc*on  will  occur  at  firm’s  minimum  average  total  cost  •  Price  will  equal  minimum  average  total  cost  

LO2  

11-­‐5  

Long Run Equilibrium

•  Entry  eliminates  profits  •  Firms  enter  •  Supply  increases  •  Price  falls  

•  Exit  eliminates  losses  •  Firms  leave  •  Supply  decreases  •  Price  rises  

LO2  

11-­‐6  

Entry Eliminates Economic Profits

(a)  Single  firm  

(b)  Industry  

P   P  

q   Q  0 0 100   90,000  80,000   100,000  

ATC  

MR  

MC  

$60  

50  

40  D1  

S1  

D2  

$60  

50  

40  

S2  

LO2  

11-­‐7  

Exit Eliminates Losses

(a)  Single  firm  

(b)  Industry  

P   P  

q   Q  0   0  100   90,000  80,000   100,000  

ATC  

MR  

MC  

$60  

50  

40  D3  

S3  

D1  

$60  

50  

40  

S1  

LO2  

11-­‐8  

Long Run Supply Curves

•  Constant-­‐cost  industry  •  Entry/exit  does  not  affect  LR  ATC  •  Constant  resource  prices  •  Special  case  

•  Increasing-­‐cost  industry  • Most  industries  •  LR  ATC  increases  with  expansion  •  Specialized  resources  

•  Decreasing-­‐cost  industry  LO3  

11-­‐9  

LR Supply: Constant-Cost Industry

P  

0 Q  90,000   100,000   110,000  Q3   Q1   Q2  

$50  

P1    P2    P3  

S  Z1   Z2  Z3  

D3   D1   D2  

LO3  

11-­‐10  

LR Supply: Increasing-Cost Industry

P  

0   Q  90,000   100,000   110,000  Q3   Q1   Q2  

$50  P1  

S  

Y1  

Y2  

Y3  

D3  D1  

D2  

$45  

$55  P2  

P3  

LO3  

11-­‐11  

LR Supply: Decreasing-Cost Industry

P  

0 Q 90,000   100,000   110,000  Q3   Q1   Q2  

$50  P1  

S  

X1  

X2  

X3  

D3  

D1  

D2  

$45  

$55  P3  

P2  

LO3  

11-­‐12  

Pure Competition and Efficiency

•  In  the  long  run,  efficiency  is  achieved  •  ProducKve  efficiency  •  Producing  where  P  =  minimum  ATC  

•  AllocaKve  efficiency  •  Producing  where  P  =  MC  

•  Triple  equality  •  P=  MC=  minimum  ATC  

•  Consumer  surplus  and  producer  surplus  are  maximized    

LO4  

11-­‐13  

Pure Competition and Efficiency

Single  Firm   Market  

Price  

Price  

QuanKty   QuanKty  

0   0  

P   MR  

D  

S  

Qe  Qf  

ATC  

MC  P=MC=Minimum  ATC  (normal  profit)

P  

Consumer  surplus  

Producer  surplus  

LO4  

11-­‐14  

Dynamic Adjustments

•  Purely  compe**ve  markets  will  automa*cally  adjust  to:  •  Changes  in  consumer  tastes  •  Resource  supplies  •  Technology  

•  Recall  the  “Invisible  Hand”  

LO4  

11-­‐15  

Technological Advance and Competition

•  Entrepreneurs  would  like  to  increase  profits  beyond  just  a  normal  profit  •  Decrease  costs  by  innova*ng  •  New  product  development  

LO5  

11-­‐16  

Creative Destruction

•  Compe**on  and  innova*on  may  lead  to  “creaKve  destrucKon”  

•  Crea*on  of  new  products  and  methods  may  destroy  the  old  products  and  methods  

LO5  

11-­‐17  

A Patent Failure?

•  Patents  give  the  inventor  exclusive  rights  to  market  and  sell  their  product  for  20  years  

•  May  hinder  “crea*ve  destruc*on”  •  Eliminate  patents  on  complicated,  hard  to  copy  products  

•  Speed  up  innova*on  by  increasing  the  opportuni*es  of  poten*al  new  compe*tors