Long Run Market Supply is Horizontal (p. 306) Entry and Exit will end when P=MC at min. of ATC = Long Run Equilibrium (Efficient Scale) Only one price is consistent with Zero Economic Profit….so the Long Run MARKET Supply curve must be horizontal at this price. Consider a horizontal long run S curve: a. if P goes above = profit = entry = increase total Q supplied b. if P goes below = loss = entry = decrease total Q supplied c. eventually, number of firms adjusts so the P = min ATC and there are enough firms to satisfy all the Demand at this price

“Constant Cost” Industries ex in 2005 AP FRQ #1 As D shifts right, P rises and firms end up with economic profits Profits = Entry: As new firms enter, it would increase the D for factors of production (inputs); as D for these increase = the price for factors of production increase (inputs P rise) ……this would change the firms cost curves This would completely change our model…so…. We use a “constant cost” industry to keep our model simple….

So as new firms enter … We assume there is no increase in the costs of production which allows us to keep our MC and ATC costs the same …..By the way…if we did allow for “Increasing cost” industries (most are in reality), we would face an ATC curve that shifts …. up (if Profit = Entry) and therefore the new efficient scale would be at a ….. higher price The new long run equilibrium would be at a ….. higher price and therefore we would have a long run market supply curve that is ….. upward sloping rather than……. horizontal as is the case in our model Could discuss decreasing costs with the opposite example with losses and exit

Perfect (Pure) Competition P = MR = MC = Min ATC = Long Run Equilibrium, or Zero Economic Profit, or NORMAL Profit Efficient – both “PRODUCTIVE” and “ALLOCATIVE”

PRODUCTIVE EFFICIENCY – produce in least costly way; ensures consumers with lowest price P = Min ATC ALLOCATIVE EFFICIENCY – resources have been apportioned among firms and markets (industries) to create the best combination of goods and services that are most wanted by society. (impossible to alter the combination of goods and or prices to create a benefit for society. If P=MC, then MB=MC

Perfect Competition has the ability to restore efficiency when it is disrupted by a change in the economy (a shift in S or D) All guided by the invisible hand