1. Pure Competition in the Long Run11
Pure Competition in the Long Run
The long‑run equilibrium position for a competitive industry is shown by reviewing the process of entry and exit in response to relative profit levels in the industry. Long‑run supply curves and the conditions of constant, increasing, and decreasing costs are explored.
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. The Long Run in Pure Competition
In the long run
Firms can expand or contract capacity
Firms enter and exit the industry
Constant cost industry
Recall, in the short run the industry is fixed in both the number of sellers and the plant size of existing sellers. In the long run all of these restrictions are relaxed.
LO1

3. Entry eliminates profits Firms enter Supply increases Price falls
Long-Run Equilibrium
Entry eliminates profits
Firms enter
Supply increases
Price falls
Exit eliminates losses
Firms exit
Supply decreases
Price rises
Profits attract firms from less profitable industries and losses cause them to leave the unprofitable industry to find another more profitable one. This reflects the supply determinant, a change in the number of sellers.
LO3

4. Pure Competition and Efficiency
In long run efficiency is achieved
Productive efficiency
Producing where P = min. ATC
Allocative efficiency
Producing where P = MC
Productive efficiency is producing goods in the least costly way. Allocative efficiency is producing the mix of goods most desired by society. Another bonus is consumer surplus and producer surplus are maximized in the long run in pure competition. Note: P=min ATC=MC does not occur in decreasing cost industries.
LO5

5. Purely competitive markets will automatically adjust to:
Dynamic Adjustments
Purely competitive markets will automatically adjust to:
Changes in consumer tastes
Resource supplies
Technology
The “Invisible Hand”
Dynamic adjustments will occur automatically in pure competition when changes in demand, or resource supplies, or technology occur. Disequilibrium will cause expansion or contraction of the industry until the new equilibrium at P = MC occurs.
“The invisible hand” works in a competitive market system since no explicit orders are given to the industry to achieve the P = MC result. The profit motivation brings about highly desirable economic outcomes.
LO6

6. Technological Advance: Competition
Entrepreneurs would like to increase profits beyond just a normal profit
Decrease costs by innovating
New product development
Innovation means using better technology or improved business organization. New product development means the firm may be first to market with a new product but others will soon follow and may destroy the innovating firm’s position.
LO6

7. Competition and innovation may lead to “creative destruction”
Creation of new products and methods
Destroys the old products and methods
Positive, but can increase unemployment
Creative destruction refers to the idea that the creation of new products and new production methods destroys the market positions of firms committed to existing products and old ways of doing business. Examples of creative destruction are CDs (compact discs) being replaced with music downloads. Faxes and s have affected traditional postal service. Online retailers like Amazon have taken business away from traditional bricks-and-mortar retailers.
LO6