Long-Run Outcomes in Perfect Competition

1.The Industry Supply Curve a.This is the relationship between the price and the total output of an industry as a whole i.This is the supply curve or market supply curve.

b. Short-run Industry Supply Curve ▫Remember in the short-run the number of firms is fixed ▫Also the industry supply curve is the horizontal sum of the individual supply curve of all firms

i.Short-run industry supply curve 1.Shows how the quantity supplied by an industry depends on the market price; give a fixed number of firms

ii. Short-run market equilibrium 1.When the quantity supplied equals the quantity demanded, taking the number of producers as a given

c. Long-run Industry Supply Curve ▫Whenever market price is above the minimum average total cost of production new firms will enter the industry.

What happens when new firms enter the industry? 1.Quantity supplied will increase 2.Short-run supply curve will shift to the right  This will alter market equilibrium and lower market price 3.Market firms will lower output in response to new market price, but the total industry out put will increase because of the larger number of firms in the industry

i.Long-run market equilibrium 1.Is when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

ii. Long-run industry supply curve 1.Shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry

2. Cost of Production and Efficiency in Long-Run Equilibrium a.3 Conclusions about cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry i.In a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms.

ii. In a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in the long-run equilibrium iii. Long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited.