©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. Unfinished Business from Perfect Competition then onto Simple Monopoly Lecture 22 Dr. Jennifer P. Wissink ©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. April 18, 2018

Finding the Long Run Market Supply Curve (with identical firms) THE MARKET a typical firm $ $ lratc 600 SRS0 w/N0* B b c A C a $2=P0* $2=P0* mr0=δ0 DN D0 SRSN w/NN* =700 Q0* Q QN* q0* q 300K 330K 350K 500 Note: Q0* = N0* times q0*

Long Run Market Supply in a Perfectly Competitive Market (assuming a “constant cost” industry) Both points A and C from the previous picture are long run equilibrium points. Point B is a temporary short run equilibrium point. If you connect all points like A and C you get the market long run supply curve in a perfectly competitive market. assumes tech doesn’t change with entry and exit assumes input prices don’t change with entry and exit P* called the “normal” price. SRS w/N* SRS w/N** B P’ A C P* LRS LRS Dnew Dold Q* Q’ Q** Q

External Economies and External Diseconomies If the industry exhibits no external economies or diseconomies, then the industry long run supply curve is perfectly elastic (horizontal). The industry grows by replicating firms at the efficient scale. Entry and exit leaves the position of cost curves intact. This is often called a constant cost industry. If the industry exhibits external diseconomies, then the industry long run supply curve is upward sloping. The minimum average total cost of all firms in the industry rises as the size of the market grows (and falls as it contracts). This is often called an increasing cost industry. If the industry exhibits external economies, then the industry long run supply curve is downward sloping. The minimum average total cost falls as the size of the industry grows (and rises as it contracts). This is often called a decreasing cost industry. Note the difference between EXTERNAL economies/diseconomies and INTERNAL economies/diseconomies of scale

Long Run Market Supply in a Perfectly Competitive Market (assuming an “increasing cost” industry) $ SRSold SRSnew LRS B E A $2=P0* Dnew Dold Q

Long Run Perfectly Competitive Equilibrium - Performance Two Efficiency Definitions The market equilibrium quantity traded (Q) is Pareto/Allocatively Efficient(AE) if net social surplus in the market is maximized. The firm is productively efficient(pe) if its output level (q) is such that the firm’s long-run average total costs are minimized. Question: Do we get either... or both... under perfect competition?

Answer: 1st Fundamental Theorem of Welfare Economics In Pictures THE MARKET a typical firm $ $ SRS w/N* lratc A a mr=δ P* P* D Q* Q q* q

Long Run Perfectly Competitive Equilibrium - Performance Equity: Is the outcome of the competitive process fair? Equitable? Just? Good questions that we do not answer here and now. What do you think? A. The market process is fair B. The market process is unfair

RECALL…Various Market Structures Next Batter Up = Monopoly Perfectly Competitive: many firms identical products free entry and exit full and symmetric information Monopoly: single firm no close substitutes, only imperfect substitutes in related markets barriers to entry and possibly exit full and symmetric information, or possibly not

Sources of Monopoly Entry Barriers Technical: Natural monopoly Vital input ownership Technical secrets (the better mousetrap) Legal: Patents Franchises Licenses Strategic: Buy ‘em up Blow ‘em up Let’s make a deal AT&T and Time Warner Chiefs to Testify,