1. Pure Competition in the Long Run09
Pure Competition in the Long Run
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. The Long Run in Pure Competition
In the long run
Firms can expand or contract capacity
Firms enter and exit the industry
LO1
9-2

3. Profit Maximization in the Long Run
Easy entry and exit
The only long-run adjustment we consider
Identical costs
All firms in the industry have identical costs
Constant-cost industry
Entry and exit do not affect resource prices
LO2
9-3

4. 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
LO3
9-4

5. Entry Eliminates Economic Profits
Single Firm
(b)
Industry P q Q
100
90,000
80,000
100,000 S1 MC
$60 50 40
ATC
$60 50 40 S2 MR D2 D1
LO3
9-5

6. Exit Eliminates Losses
Single Firm
(b)
Industry P q Q
100
90,000
80,000
100,000 S3 MC
$60 50 40
$60 50 40
ATC S1 MR D1 D3
LO3
9-6

7. Constant cost industry Entry/exit does not affect LR ATC
Long Run Supply
Constant cost industry
Entry/exit does not affect LR ATC
Constant resource price
Special case
Increasing cost industry
Most industries
LR ATC increases with expansion
Specialized resources
Decreasing cost industry
LO4
9-7

8. LR Supply: Constant-Cost IndustryQ P1 P2 P3
$50 S Z3 Z1 Z2 D3 D1 D2 Q3 Q1 Q2
90,000
100,000
110,000
LO4
9-8

9. LR Supply: Increasing-Cost IndustryQ S P2
$55 Y2 P1
$50 Y1 P3
$40 Y3 D2 D1 D3 Q3 Q1 Q2
90,000
100,000
110,000
LO4
9-9

10. LR Supply: Decreasing-Cost IndustryQ X3 P3
$55 X1 P1
$50 X2 P2
$40 S D3 D2 D1 Q3 Q1 Q2
90,000
100,000
110,000
LO4
9-10

11. Pure Competition and Efficiency
In the long run, efficiency is achieved
Productive efficiency
Producing where P = min. ATC
Allocative efficiency
Producing where P = MC
LO5
9-11

12. Pure Competition and Efficiency
Single Firm
Market
Price
Quantity
P=MC=Minimum
ATC (Normal Profit) MC
Consumer Surplus S
ATC P MR P
Producer Surplus D Qf Qe
LO5
9-12

13. Purely competitive markets will automatically adjust to
Dynamic Adjustments
Purely competitive markets will automatically adjust to
Changes in consumer tastes
Resource supplies
Technology
Recall the “Invisible Hand”
LO6
9-13

14. Technological Advance: Competition
Entrepreneurs would like to increase profits beyond just a normal profit
Decrease costs by innovating
New product development
LO6
9-14

15. Competition and innovation may lead to “creative destruction”
Creation of new products and methods destroys the old products and methods
LO6
9-15

16. Efficiency Gains from Entry
Patent protected prescription drugs earn substantial economic profits for the pharmaceutical company
Generic drugs become available as the patent expires on the existing drug
Results in a 30-40% reduction price
Greater consumer surplus and efficiency
9-16

17. Efficiency Gains from EntryP1 b c d f P2 D Q1 Q2
9-17