1. Economics 101 – Section 5 Lecture #19 – Tuesday, March 30, 2004
Chapter 8
Competition in the Short-Run
Competition in the Long-Run
Technology in the Long-run

2. Lecture Overview NOTE: Exam #3 Thursday April 8th
Including material since last midterm up to an including the material for next Tuesday.
Finish up wheat example from last day
Competition and short-run equilibrium
Long-run equilibrium
Entry and exit from the industry and the long-run
The role of technology
Start on monopoly

3. Figure 5 Deriving the Market Supply Curve

4. Figure 6 Perfect Competition

5. Competitive Markets in the SR
What is going on for individual firms when there are changes in the market price?
Would obviously think that as prices go down then firms are going to be worse off?
Why? Because they are getting less $
How does this tie into their cost structure and all these graphs we have been using?

6. Figure 7 Short-Run Equilibrium in Perfect Competition
(a)
(b)
Market
Firm
Price
Dollars
per
Bushel S MC
ATC
$3.50 d 2
Loss per
Bushel
at p = $2
2.00
4,000 D
400,000
$3.50 d 1
Profit per
Bushel
at p = $3.50 D 1
700,000
Bushels
7,000
Bushels
per Year
per Year

7. Competitive markets in the Long-run (LR)
What happens to firms that are making profits in the short-run? Those making losses?
In short,
if there is profit more firms will enter
If there is loss, firms will exit the industry
In a competitive market, economic profit and loss are the forces driving long-run change
The expectation of continued economic profit causes outsiders to enter the market, the expectation of continued economic losses causes firms in the market to exit

8. Competitive markets in the Long-run (LR)
Long-run equilibrium
If there were profits in the short-run (SR) then entry will shift the market supply to the right until profits are eroded
If there were losses in the SR then exit will cause the market supply to shift left until there are no there are no longer any losses.

9. FIGURE 8a From Short-Run Profit to Long-Run Equilibrium
Bushels
per Year
Price
per
Bushel S 1 D A
900,000
$4.50
With initial
supply curve
, market
price is $

10. FIGURE 8b From Short-Run Profit to Long-Run EquilibriumA d 1
Bushels
per Year
Dollars
9,000
$4.50
ATC MC
5,000
. . . so each
firm earns an
economic profit

11. FIGURE 8c From Short-Run Profit to Long-Run Equilibrium
Bushels
per Year
Price
per
Bushel
1,200,000
2.50 S 1 D A E 2
900,000
$4.50
Profit attracts
entry, shifting the
supply curve
rightward . . .

12. FIGURE 8d From Short-Run Profit to Long-Run EquilibriumA d 1 2
Bushels
per Year
5,000
9,000
2.50
$4.50
ATC MC
. . . until market
price falls to $2.50
and each firm earns
zero economic profit

13. Competitive markets in the Long-run (LR)
In the long-run all competitive firms will earn zero economic profit (normal profit)
Why zero economic profit?
Recall the difference between economic profit and accounting profit.
A business or firm may be making positive accounting profit but zero economic profit.
This zero economic profit basically implies that there is not too much money to be made – i.e. there are acceptable or normal profits to warrant continued operation but they are neither large enough to entice further entry nor low enough to cause additional exit

14. Competitive markets in the Long-run (LR)
In long-run equilibrium:
All competitive firms will select its plant size and output level so that it operates at the minimum point of its LRATC curve
Why? – This is the only point where profit is zero in the long run and production still takes place

15. Figure 9 Perfect Competition and Plant Size
Dollars
(b) E
Output
per
Period
d2 = MR2
LRATC
MC2
ATC2 P* q*
Dollars
LRATC
MC1
ATC1 P 1
d1 = MR1 q1
Output
per
Period

16. Competitive markets in the Long-run (LR)
For every competitive firm in long-run equilibrium the following must hold:
P=MC=minimum ATC=minimum LRATC

17. Competitive markets in the Long-run (LR)
What happens if there is a shift in demand? What will happen to the long-run equilibrium?
The following is the scenario for an increasing cost industry
1) Move up MC in the SR and firms earn positive economic profits
2) Profits attract new entrants – this increases market supply and drives up ATC
3) A new equilibrium will be occur where profits once again return to zero with the new ATC curve
4) The long-run price will be higher than what it was before the demand shock
Can use this new information to map out the LR market supply curve

18. Figure 10 An Increasing-Cost Industry
Market
Firm
Price
Dollars
per
Unit
QSR D2 B
PSR
qSR
dSR= MRSR S1 MC 2
ATC P2
d2= MR2 q2 C Q2 S2
SLR
ATC1 P1 P1
d1= MR1 A A D1 Q1
Output q1
Output
per
per
Period
Period

19. Competitive markets in the Long-run (LR)
The long-run supply curve – is the curve indicating the quantity of output that will be supplied at each price after all long-run adjustments have been made
Increasing cost industry – The long-run supply curve will be upward sloping
Constant cost industry – The long-run supply curve will be flat (horizontal)
Decreasing cost industry – The long-run supply curve will be downward sloping

20. Changes in technology
Under perfect competition – a technological advance making production cheaper or more efficient will cause the market supply curve to shift right
This will result in a lower price (and likely a higher quantity traded) in equilibrium
Early adopters may make SR profits, but in the LR all firms will earn zero economic profit (or simply normal profit)

21. Figure 11 Technological Change in Perfect Competition
(a) Market
(b) Firm
Price
Dollars S1
per
per
Bushel
Bushel
ATC2
d2 = MR2 2 S2 Q2 B
ATC1 A $3 $3
d1 = MR1 D Q1
Bushels
1000
Bushels
per Day
per Day

22. Monopoly