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The Long Run in Pure Competition
LO1 9-2
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
Long-Run Equilibrium
• Entry eliminates profits
• Firms enter
• Supply increases
• Price falls
• Exit eliminates losses
• Firms exit
• Supply decreases
• Price rises
LO3 9-4
Entry Eliminates Economic Profits
P P
S1
MC
ATC S2
$60 $60
50 50
MR
D2
40 40
D1
LO3 9-5
Exit Eliminates Losses
P P
S3
MC
ATC $60 S1
$60
50 50
MR
D1
40 40
D3
LO3 9-6
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
LR Supply: Constant-Cost Industry
P1
P2 $50 S
Z3 Z1 Z2
P3
D3 D1 D2
0 Q3 Q1 Q2 Q
90,000 100,000 110,000
LO4 9-8
LR Supply: Increasing-Cost Industry
S
P2 $55
Y2
P1 $50
Y1
P3 $40
Y3
D2
D1
D3
0 Q3 Q1 Q2 Q
90,000 100,000 110,000
LO4 9-9
LR Supply: Decreasing-Cost Industry
X3
P3 $55
P1 $50 X1
P2 $40 X2
S
D3 D2
D1
0 Q3 Q1 Q2 Q
90,000 100,000 110,000
LO4 9-10
Pure Competition and Efficiency
LO5 9-11
Pure Competition and Efficiency
Price
Price
P MR P Producer
Surplus
D
0 Qf 0 Qe
Quantity Quantity
LO5 9-12
Dynamic Adjustments
LO6 9-13
Technological Advance: Competition
LO6 9-14
Creative Destruction
LO6 9-15
Efficiency Gains from Entry
9-16
Efficiency Gains from Entry
a
S
P1 b c
d
P2 f
Q1 Q2
9-17