AP Economics Mr. Bernstein Module 60: Long-Run Outcomes in Perfect Competition November 12, 2014

AP Economics Mr. Bernstein The Industry Supply Curve In Perfect Competition, there are many small firms producing identical products Each has an identical Short-Run cost curve, which is the MC curve above the shutdown point (AVC) As P rises, output rises along the MC curve 2

AP Economics Mr. Bernstein The Industry Supply Curve The sum of each firm’s output on their Short-Run supply curve is the Industry Short-Run Supply Curve 3

AP Economics Mr. Bernstein Long-Run Equilibrium In Perfect Competition, firms earn a normal profit But profits and losses occur in the short run… …those profits and losses do not last, through a process of adjustment 4

AP Economics Mr. Bernstein The Long-Run Process of Adjustment When profits exist in the short run The market sees entry of new firms More producers in the market shift the short-run market supply curve to the right The price begins to fall in the market As the price falls, each firm produces less along their MC curve Profits for each firm fall When the price reaches the break-even point at the minimum of ATC, entry stops 5

AP Economics Mr. Bernstein The Long-Run Process of Adjustment When losses exist in the short run Firms exit Fewer producers in the market shift the short-run market supply curve to the left The price begins to rise in the market As the price rises, each firm produces more along their MC curve Losses for each firm fall When the price reaches the break-even point at the minimum of ATC, exit stops 6

AP Economics Mr. Bernstein The Long-Run Process of Adjustment At P = $8, P > ATC, profit, firms enter, Supply shifts right, P falls, firm Q falls …(notice we are presenting the market graph and firm graph side-by-side) 7

AP Economics Mr. Bernstein Long-Run Industry Supply Curves 8

AP Economics Mr. Bernstein Long-Run Industry Supply Curves Constant Cost Industry – Supply curve is horizontal Increasing Cost Industry – more realistic – costs rise as competitors enter (bidding for resources, increase in advertising, etc.) Decreasing Cost Industry – Supply Curve is downward sloping – it is possible for input costs to decrease as an industry grows (ie electric cars) 9

AP Economics Mr. Bernstein Efficiency in Long-Run Equilibrium in Perfect Competition Productive Efficiency: ATC is at minimum Allocative Efficiency: P = MC All firms earn normal profit in long run Revenues cover costs AND next best alternative So no existing firms exit and no new firms wish to enter No Deadweight Loss, all mutually beneficial transactions are made We will compare this to outcomes in other market structures 10