Lecture Economics (19/e) - Chapter 9: Pure competition in the long run

09
Pure Competition in the Long Run

McGraw­Hill/Irwin

        Copyright © 2012 by The McGraw­Hill Companies, Inc. All rights reserved.


The Long Run in Pure Competition

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

LO1

9-2


Profit Maximization in the Long Run

• Easy entry and exit
• The only long-run adjustment we
•
•
LO2

consider
Identical costs
• All firms in the industry have identical

costs
Constant-cost industry
• Entry and exit do not affect resource
prices
9-3


Long­Run Equilibrium

• Entry eliminates profits
• Firms enter
• Supply increases
• Price falls
• Exit eliminates losses
• Firms exit
• Supply decreases
• Price rises
LO3

9-4


Entry Eliminates Economic Profits
S1
MC
$60

ATC

50

40

$60

S2

50

MR

40

D2
D1

LO3

9-5


Exit Eliminates Losses
S3
MC
$60

ATC

S1

50

50
40

$60

MR

40

D1
D3

LO3

9-6


•

•

LO4

•

Long Run Supply
Constant cost industry
• Entry/exit does not affect LR ATC
• Constant resource price

• Special case
Increasing cost industry
• Most industries
• LR ATC increases with expansion
• Specialized resources
Decreasing cost industry
9-7


LR Supply: Constant­Cost Industry

$50

Z3

Z1

D1

D3
Q3
90,000

LO4

Z2

Q1
100,000

S

D2
Q2
110,000

9-8


LR Supply: Increasing­Cost Industry

S

P2 $55

Y2

P1 $50

Y1

P3 $40
Y3

D2
D1

D3
Q3
90,000

LO4

Q1
100,000

Q2
110,000

9-9


LR Supply: Decreasing­Cost Industry

P3 $55

X3
X1

P1 $50

X2

P2 $40
D3

S
D2

D1

Q3
90,000

LO4

Q1
100,000

Q2
110,000

9-10


Pure Competition and Efficiency 

• In the long run, efficiency is achieved
• Productive efficiency
• Producing where P = min. ATC
• Allocative efficiency
• Producing where P = MC

LO5

9-11


Pure Competition and Efficiency

P=MC=Minimum

ATC (Normal Profit) MC

Consumer
Surplus

S

ATC

P

MR P

Producer
Surplus
D

Qf

LO5

Qe

9-12


Dynamic Adjustments

• Purely competitive markets will

•

LO6

automatically adjust to
• Changes in consumer tastes
• Resource supplies
• Technology
Recall the “Invisible Hand”

9-13


Technological Advance: Competition

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

LO6

9-14


Creative Destruction

• Competition and innovation may lead
to “creative destruction”
• Creation of new products and

methods destroys the old products
and methods

LO6

9-15


Efficiency Gains from Entry

• Patent protected prescription drugs earn
•

substantial economic profits for the
pharmaceutical company
Generic drugs become available as the
patent expires on the existing drug
• Results in a 30-40% reduction price
• Greater consumer surplus and
efficiency
9-16


Efficiency Gains from Entry
a
P1

P2

S

b

c

d

f

D
Q1

Q2

9-17