PRINCIPLES OF MICROECONOMICS Wajid Ali Qureshi

1
 CHAPTER 11
Pure Competition in the Long Run

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 Chapter Contents
The Long Run in Pure Competition
The Long-Run Adjustment Process in Pure Competition
Long-Run Supply Curves
Pure Competition and Efficiency
Technological Advance and Competition

11-3
THE LONG RUN IN PURE COMPETITION
In the long run:
• Firms can expand or contract capacity.
• Firms can enter or exit the industry.
Decisions are based on the incentives of profits or
losses.
Long-run supply curve.

11-4
LO11.1
PROFIT MAXIMIZATION IN THE LONG RUN
Easy entry and exit: The only long-run adjustment we
consider in this analysis.
Identical costs: All firms in the industry have identical
costs.
Constant-cost industry: Entry and exit of firms does
not affect resource prices

11-5
LO11.1
LONG-RUN ADJUSTMENT PROCESS
Adjustment process in pure competition:
• Firms seek profits and shun losses.
• Firms are free to enter or to exit.
• Production will occur at firm’s minimum average
total cost.
• Price will equal minimum average total cost.

11-6
LO11.2
LONG-RUN EQUILIBRIUM
Entry eliminates profits:
• Firms enter
• Supply increases
• Price falls
Exit eliminates losses:
• Firms leave
• Supply decreases
• Price rises
11-7
LO11.2
TEMPORARY PROFITS AND THE REESTABLISHMENT OF
LONG-RUN EQUILIBRIUM
P P S1

MC

ATC
S2
$60 $60

50 MR 50
D2
40 40

D1

0 10 q 0 90,000 100,000 110,000 Q

0 (a) (b)
Single firm Industry
11-8
LO11.2
TEMPORARY LOSSES AND THE REESTABLISHMENT OF
LONG-RUN EQUILIBRIUM
P P
S3
MC
ATC

S1
$60 $60
50 MR 50
D1
40 40

D3

0 q Q
100 0 90,000 100,000
(a) (b)
Single firm Industry
11-9
LO11.2
LONG-RUN SUPPLY CURVES
Constant-cost industry:
• Entry or exit does not affect LR ATC
• Constant resource prices
• Special case
Increasing-cost industry:
• Most industries
• LR ATC increases with expansion
• Specialized resources
Decreasing-cost industry 11-10
LO11.3
THE LONG-RUN SUPPLY CURVE FOR A CONSTANT-COST INDUSTRY

P1

P2 = $50 S
Z3 Z1 Z2
P3

D1 D2
D3

0 Q3 Q1 Q2 Q
90,000 100,000 110,000

11-11
LO11.3
THE LONG-RUN SUPPLY CURVE FOR AN INCREASING-COST
INDUSTRY
P

S
P2 $55
P1 50 Y2
Y1
P3 45 D2
Y3
D1
D3
0 Q3 Q1 Q2 Q
90,000 100,000 110,000

11-12
LO11.3
THE LONG-RUN SUPPLY CURVE FOR A DECREASING-COST
INDUSTRY
P

D3 D1
D2
X3
P3 $55
X1
P1 50
X2
P2 45
S

0 Q3 Q1 Q2 Q
90,000 100,000 110,000

11-13
LO11.3
PURE COMPETITION AND EFFICIENCY
In the long run, efficiency is achieved.
Productive efficiency: Producing where P = minimum
ATC.
Allocative efficiency: Producing where P = MC.
Triple equality: P = MC = minimum ATC.
Consumer surplus and producer surplus are
maximized.

11-14
LO11.4
LONG-RUN EQUILIBRIUM: A COMPETITIVE FIRM AND MARKET

MC S
Consumer
ATC surplus

Price
Price

P MR
P Producer
surplus
P = MC = minimum
ATC (normal profit) D
0
Qf 0 Qe
Quantity Quantity
(a) Single firm (b) Market

11-15
LO11.4
DYNAMIC ADJUSTMENTS
Purely competitive markets will automatically adjust to:
• Changes in consumer tastes.
• Resource supplies.
• Technology.
• Recall the “invisible hand.”

11-16
LO11.4
TECHNOLOGICAL ADVANCE AND COMPETITION
Entrepreneurs would like to increase profits beyond just
a normal profit:
• Decrease costs by innovating
• New product development

11-17
LO11.5
CREATIVE DESTRUCTION
Competition and innovation may lead to creative
destruction.
Creation of new products and methods may destroy
the old products and methods.

11-18
LO11.5