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PPA 723: Managerial Economics Lecture 13: Competition in the Long Run
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Managerial Economics, Lecture 13: Competition in Long Run Outline Profit Maximization in the Long Run The Long-Run Supply Curve Characteristics of Long-Run Equilibrium in a Competitive Market
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Managerial Economics, Lecture 13: Competition in Long Run LR Competitive Profit Maximization In competitive markets, firms are still price takers in the long run. So the long-run output decision is to set output at the q* where p = LRMC(q*)
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Managerial Economics, Lecture 13: Competition in Long Run Long-Run Shut-Down Decision In the long run, a firm operates only if revenue variable cost. All costs are variable in the long run, so the shut-down rule in the long run is to operate only if revenue cost i.e., if p minimum of AC curve.
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Managerial Economics, Lecture 13: Competition in Long Run Short Run vs. Long Run In the short run, a firm compares its revenue only to its avoidable (variable) cost, It ignores sunk fixed costs. In the long run, all costs are avoidable. A firm can eliminate them by shutting down. So a firm shuts down if LR profit is negative: i.e., if < 0
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Managerial Economics, Lecture 13: Competition in Long Run Long-Run Firm Supply Curve Because all costs are variable in the long run, the long-run firm supply curve equals the long-run MC curve above the minimum of the long-run AC curve. A firm chooses its capital in the long- run, so the long-run supply curve may differ from the short-run supply curve.
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Managerial Economics, Lecture 13: Competition in Long Run Figure 8.11 The Short-Run and Long-Run Supply Curves p, $ per unit 50110q, Units per year 25 24 28 35 20 0 p SRAC LRMC LRAC SRMC SRAVC B A S SR S LR
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Managerial Economics, Lecture 13: Competition in Long Run LR Market Supply Curve The market supply curve = the horizontal sum of firms' supply curves in both the long-run and the short-run. The market supply curve differs in the long-run and the short-run because of differences in number of firms and, perhaps, in input prices.
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Managerial Economics, Lecture 13: Competition in Long Run Number of Firms In the short run, each firm can produce more or less, but the number of firms, n, is fixed. In the long run, firms can produce more or less and firms can enter or exit the market. Firms enter a market in response to profits and exit in response to losses.
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Managerial Economics, Lecture 13: Competition in Long Run p p, $ per unit 150 LRAC LRMC (a) Firm q, Hundred metric tons of oil per year 10 S 1 0 p, $ per unit (b) Market Q, Hundred metric tons of oil per year Long-run market supply before entry 10 0 p1p1 Profit p1p1 Entry S1S1 S2S2 D
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Managerial Economics, Lecture 13: Competition in Long Run Long-Run Market Supply The long-run market supply curve is flat at the minimum long-run average cost if There is free entry and exit. An unlimited number of firms have identical costs. Input prices are constant as the number of firms changes.
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Managerial Economics, Lecture 13: Competition in Long Run p p, $ per unit 150 LRAC LRMC (a) Firm q, Hundred metric tons of oil per year 10 S 1 0 p, $ per unit (b) Market Q, Hundred metric tons of oil per year Long-run market supply curve with entry 10 0
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Managerial Economics, Lecture 13: Competition in Long Run Why Long-Run Market Supply Curve Sometimes Slopes Factors that lead to a long-run supply curve that is not flat include Barriers to entry Variation in costs across firms Input prices that vary with market output.
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Managerial Economics, Lecture 13: Competition in Long Run Figure 8.13 Long-Run Market Supply in an Increasing- Input-Cost Market p, $ per unit q 1 q 2 Q 1 =n 1 q 1 Q 2 =n 2 q 2 q, Units per yearQ p 1 p 2 e 2 e 1 E 2 S E 1 p, $ per unit (a) Firm (b) Market AC 2 MC 2 1 AC 1
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Managerial Economics, Lecture 13: Competition in Long Run Figure 8.14 Long-Run Market Supply in an Decreasing- Input-Cost Market p, $ per unit q 1 q 2 Q 1 =n 1 q 1 Q 2 =n 2 q 2 q, Units per yearQ p 1 p 2 e 2 e 1 E 2 S E 1 p, $ per unit (a) Firm (b) Market AC 2 MC 2 1 AC 1
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Managerial Economics, Lecture 13: Competition in Long Run Long-Run Competitive Equilibrium The intersection of the long-run market supply and demand curves determines long- run competitive equilibrium With identical firms, constant input prices, and free entry and exit, The long-run market supply curve is horizontal at minimum long-run AC The equilibrium price = minimum long-run AC A shift in the demand curve affects only equilibrium quantity and not equilibrium price.
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Managerial Economics, Lecture 13: Competition in Long Run Figure 8.15 The Short-Run and Long-Run Equilibria for Vegetable Oil p, $ per ton e 1 f 2 1000150165 q, Hundred metric tons of oil per year 11 10 7 MC AVC (a) Firm AC p, $ per ton F 1 E 1 F 2 E 2 1,50002,0003,3003,600 Q, Hundred metric tons of oil per year 11 10 7 (b) Market D 1 S SR S LR D 2 f
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Managerial Economics, Lecture 13: Competition in Long Run Characteristics of Long-Run Competitive Equilibrium All firms earn zero economic profit (which means they earn the same business profit they could earn elsewhere). All firms in market operate at minimum long-run AC; i.e, they produce the equilibrium quantity using the minimum possible resources.
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