1. PERFECT COMPETITION IN THE LONG RUN Microeconomics Made Easy by William Yacovissi Mansfield University © William Yacovissi All Rights Reserved

2. LONG RUN COMPETITION l A very interesting characteristic of perfect competition in the long run is the difficulty companies have in continuing to make economic profits in the long run l Make sure you understand the difference between economic profits and normal profits as discussed on page 197

3. LONG RUN COMPETITION l Because there are no barriers to entry in competitive markets, the presence of economic profits is sure to encourage new entries into the market. l For example, suppose you had the only video rental store in town and it was obvious to everyone that you were making substantial amounts of money

4. LONG RUN COMPETITION l You would expect that sooner or later another store would open offering exactly the same movies. l If both of you continue to make serious money, you can sure a third store will open.

5. LONG RUN COMPETITION l As long as market demand is expanding all of the stores can make economic profits. But sooner or later market demand levels off as the market matures. l Now the business new competitors do can only come out of the business existing stores are doing. Eventually as new stores open up, economic profits have to diminish

6. LONG RUN COMPETITION l As long as economic profits are present, there is incentive for new stores to open up. Once the economic profits are gone, there is no incentive for new stores to open up but no reason for existing stores to close l Check out the case in point on page 202 l This process can be illustrated graphically

7. LONG RUN COMPETITION

8. l The market is in equilibrium at point A. Rising demand pushes the market price to point B and creates economic profits as shown by the shaded rectangle. l Economic profits attract new companies expanding the market supply forcing market equilibrium to point C.

9. LONG RUN COMPETITION l At point C the market price is back to it’s long term price and the economic profits are gone