Chapter 11. Pure Competition in the Long Run

Chapter 11Pure Competition in the Long RunCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.The Long Run in Pure CompetitionIn the long-runFirms can expand or contract capacityFirms can enter or exit the industryLO1Profit 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 of firms do not affect resource pricesLO1Long Run Adjustment ProcessAdjustment process in pure competitionFirms seek profits and shun lossesFirms are free to enter or to exitProduction will occur at firm’s minimum average total costPrice will equal minimum average total costLO2Long Run EquilibriumEntry eliminates profitsFirms enterSupply increasesPrice fallsExit eliminates lossesFirms leaveSupply decreasesPrice risesLO2Entry Eliminates Economic ProfitsLO3ATCMRMC$605040D1S1D2$605040S2LO2Exit Eliminates LossesATCMRMC$605040D3S3D1$605040S1LO2Long Run Supply CurvesConstant-cost industryEntry/exit does not affect LR ATCConstant resource pricesSpecial caseIncreasing-cost industryMost industriesLR ATC increases with expansionSpecialized resourcesDecreasing-cost industryLO3Pure Competition and EfficiencyIn the long run, efficiency is achievedProductive efficiencyProducing where P = minimum ATCAllocative efficiencyProducing where P = MCTriple equalityP= MC= minimum ATCConsumer surplus and producer surplus are maximizedLO4Dynamic AdjustmentsPurely competitive markets will automatically adjust to:Changes in consumer tastesResource suppliesTechnologyRecall the “Invisible Hand”LO4Technological Advance and CompetitionEntrepreneurs would like to increase profits beyond just a normal profitDecrease costs by innovatingNew product developmentLO5Creative DestructionCompetition and innovation may lead to “creative destruction”Creation of new products and methods may destroy the old products and methodsLO5