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Long-run (the time it takes for the industry to adjust output to the change in demand or supply) equilibrium for the purely competitive firm P Q ATC MC.

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Presentation on theme: "Long-run (the time it takes for the industry to adjust output to the change in demand or supply) equilibrium for the purely competitive firm P Q ATC MC."— Presentation transcript:

1 Long-run (the time it takes for the industry to adjust output to the change in demand or supply) equilibrium for the purely competitive firm P Q ATC MC MR PRICE QUANTITY Zero Economic Profit AVC

2 The cost curves we used in previous activities were short-run curves. P Q ATC MC MR PRICE QUANTITY Zero Economic Profit AVC

3 In the short-run, firms can vary output but not plant capacity. P Q ATC MC MR PRICE QUANTITY Zero Economic Profit AVC Average Fixed cost

4 Now we turn to the long-run: a time period in which the firm can vary its plant capacity and output P Q ATC MC MR PRICE QUANTITY Zero Economic Profit AVC

5 In the short-run, the shapes of the average and marginal cost curves result from diminishing marginal productivity of the resources. P Q ATC MC MR PRICE QUANTITY Zero Economic Profit AVC

6 So in the long-run for the firm, we only have a total cost curve, since all costs are variable. LRATC is created from the different ATC curves (now called SRATC) of the plant capacity (different size or number of plants) over time. P Q SRATC MC MR PRICE QUANTITY Zero Economic Profit AVC

7 LRATC is created from the different ATC curves (now called SRATC) of the plant capacity (different size or number of plants) over time. SRATC 1 PRICE QUANTITY SRATC 2 SRATC LRATC

8 In the long-run for the firm, the shape of LRATC results from economies and diseconomies of scale see chapter 9, pgs 176 - 181 P Q SRATC PRICE QUANTITY Q1 SRATC1SRATC2 SRATC3 LRATC

9 Sources of Economies of scale Specialization in resources More efficient uses of equipment A reduction of per-unit costs of factor inputs An effective use of production by-products An increase in shared facilities

10 Sources of Diseconomies of scale see chapter 10, pgs 204-205 Limitations on management decision making Competition for factor inputs

11 Quick Quiz #1 what do the minimum points of each of the short-run ATC curves represent? P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC

12 Quick Quiz #1 what do the minimum points of each of the short-run ATC curves represent? P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC

13 Quick Quiz #2 the firm can minimize costs by producing output level Q using firm size _______. This means it would be over/under utilizing firm size SRATC / SRATC1 P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC LRATC

14 the firm can minimize costs by producing output level Q using firm size SRATC. This means it would be over utilizing firm size SRATC P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC LRATC

15 Quick Quiz #3 label the optimum output level in the graph as Q LR P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC LRATC

16 Q LR: the optimum output level P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC LRATC Q LR

17 Quick Quiz #4 To produce at output level Q1, the firm should use plant size ______. This would over / under utilize plant size (SRATC1 / SRATC2) P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC LRATC

18 To produce at output level Q1, the firm should use plant size SRATC2. This would underutilize plant size SRATC2 P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC LRATC Qlr

19 Quick Quiz #5 The firm experiences economies of scale up to output level ____, and diseconomies of scale beyond output level _____. P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC LRATC Q LR

20 The firm experiences economies of scale up to output level Q LR, and diseconomies of scale beyond output level Q LR. P Q SRATC 1 PRICE QUANTITY Q1 SRATC 2 SRATC LRATC Q LR

21 the firm, in the graph, experiences constant returns to scale between output levels Q1 and Q2. Give an example of a type of firm that experiences constant returns to scale. P Q SRATC PRICE QUANTITY Q3 SRATC1SRATC2 SRATC3 LRATC Q2Q1

22 Constant returns to scale changes in the number of firms in the industry have little effect on the costs of individual firms in the industry Furniture industry –There are trees available for lots of reasons, from housing, to paper, to Christmas trees, to furniture, and any one furniture firm is a relatively small percentage of the total demand for wood Household appliance industry –There is steel available for lots of industries, and any one household appliance firm is a relatively small percentage of the demand for steel

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