Bài giảng MicroEconomics - Chapter 9 Pure Competition in the Long Run

Pure Competition in the Long Run09McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.The Long Run in Pure CompetitionIn the long runFirms can expand or contract capacityFirms enter and exit the industryLO19-2Profit Maximization in the Long RunEasy entry and exitThe only long-run adjustment we considerIdentical costsAll firms in the industry have identical costsConstant-cost industryEntry and exit do not affect resource pricesLO29-3Long-Run EquilibriumEntry eliminates profitsFirms enterSupply increasesPrice fallsExit eliminates lossesFirms exitSupply decreasesPrice risesLO39-4Entry Eliminates Economic ProfitsLO3ATCMRMC$605040D1S1D2$605040S29-5Exit Eliminates LossesLO3ATCMRMC$605040D3S3D1$605040S19-6Long Run SupplyConstant cost industryEntry/exit does not affect LR ATCConstant resource priceSpecial caseIncreasing cost industryMost industriesLR ATC increases with expansionSpecialized resourcesDecreasing cost industryLO49-7LR Supply: Constant-Cost IndustryLO490,000100,000110,000Q3Q1Q2$50SZ1Z2Z3D3D1D29-8LR Supply: Increasing-Cost IndustryLO490,000100,000110,000Q3Q1Q2$50P1SY1Y2Y3D3D1D2$40$55P2P39-9LR Supply: Decreasing-Cost IndustryLO490,000100,000110,000Q3Q1Q2$50P1SX1X2X3D3D1D2$40$55P3P29-10Pure Competition and Efficiency In the long run, efficiency is achievedProductive efficiency Producing where P = min. ATCAllocative efficiencyProducing where P = MCLO59-11Pure Competition and EfficiencyLO5PMRDSQeQfATCMCP=MC=MinimumATC (Normal Profit)PConsumer SurplusProducer Surplus9-12Dynamic AdjustmentsPurely competitive markets will automatically adjust toChanges in consumer tastesResource suppliesTechnologyRecall the “Invisible Hand”LO69-13Technological Advance: CompetitionEntrepreneurs would like to increase profits beyond just a normal profitDecrease costs by innovatingNew product developmentLO69-14Creative DestructionCompetition and innovation may lead to “creative destruction”Creation of new products and methods destroys the old products and methodsLO69-15Efficiency Gains from EntryPatent protected prescription drugs earn substantial economic profits for the pharmaceutical companyGeneric drugs become available as the patent expires on the existing drugResults in a 30-40% reduction priceGreater consumer surplus and efficiency9-16Efficiency Gains from EntryQ1Q2P1SDP2abcdf9-17