How Does A Perfectly Competitive Market Reach Long Run Equilibrium?

Transcription

1 How Does A erfectly Competitive Market Reach Long Run Equilibrium?

2 Side-by-side graph for perfectly completive industry and firm. Is the firm making a profit or a loss? Why? S $15 $15 MR=D AVC D 5000 Industry 8 Firm (price taker) 2

3 Cost and Revenue Where is the profit maximization point? How do you know? What output should be produced? What is TR? What is TC? How much is the profit or loss? Where is the Shutdown oint? $ rofit MR= AVC 10 Total Revenue Total Cost

4 I. Supply Revisited 4

5 Cost and Revenue $ Marginal Cost and Supply As price increases, the quantity increases AVC MR 5 MR 4 MR 3 MR 2 MR 1 5

6 Cost and Revenue Marginal Cost and Supply When price increases, quantity increases When price decrease, quantity decreases $ AVC = Supply above AVC is the supply curve 6

7 Cost and Revenue Marginal Cost and Supply What if variable costs increase (ex: tax)? $ =Supply 2 1 =Supply 1 AVC AVC When increases, SULY decrease

8 Cost and Revenue Marginal Cost and Supply What if variable costs decrease (ex: subsidy)? $ =Supply 1 2 =Supply 2 AVC AVC When decreases, SULY increases

9 II. erfect Competition in the Long-Run You are a wheat farmer. You learn that there is a more profit in making corn. What do you do in the long run? 9

10 In the Long-run Firms will enter if there is profit Firms will leave if there is loss So, ALL firms break even, they make NO economic profit (No Economic rofit=normal rofit) In long run equilibrium a perfectly competitive firm is EXTREMELY efficient. 10

11 Side-by-side graph for perfectly completive industry and firm in the LONG RUN Is the firm making a profit or a loss? Why? S $15 $15 MR=D D 5000 Industry 8 Firm (price taker) 11

12 Firm in Long-Run Equilibrium rice = = Minimum Firm making a normal profit $15 TC = TR MR=D There is no incentive to enter or leave the industry

13 III. Going from Long- Run to Short-Run 13

14 1. Is this the short or the long run? Why? 2. What will firms do in the long run? 3. What happens to and in the industry? 4. What happens to and in the firm? S $15 $15 MR=D D Industry 8 Firm 14

15 Firms enter to earn profit so supply increases in the industry rice decreases and quantity increases S S 1 $15 $15 $ Industry D 8 Firm MR=D 15

16 rice falls for the firm because they are price takers. rice decreases and quantity decreases S S 1 $15 $15 MR=D $10 $10 MR 1 =D 1 D Industry 5 8 Firm 16

17 New Long Run Equilibrium at $10 rice Zero Economic rofit S 1 $10 $10 D Industry Firm 17 5 MR 1 =D 1

18 1. Is this the short or the long run? Why? 2. What will firms do in the long run? 3. What happens to and in the industry? 4. What happens to and in the firm? S $15 $15 MR=D D Industry 8 Firm 18

19 Firms leave to avoid losses so supply decreases in the industry rice increases and quantity decreases S 1 S $20 $15 $15 MR=D D Industry 8 Firm 19

20 rice increase for the firm because they are price takers. rice increases and quantity increases S 1 S $20 $20 $15 $15 MR 1 =D 1 MR=D D Industry 8 Firm 9 20

21 New Long Run Equilibrium at $20 rice Zero Economic rofit S 1 $20 $20 MR 1 =D 1 D 4000 Industry Firm 21 9

22 IV. Going from Long- Run to Long-Run 22

23 Currently in Long-Run Equilibrium If demand increases, what happens in the short-run and how does it return to the long run? S $15 $15 MR 1 =D 1 MR=D D 5000 Industry 8 Firm 23

24 Demand Increases The price increases and quantity increases rofit is made in the short-run S $20 $20 $15 $15 MR 1 =D 1 MR=D D 1 D 5000 Industry 8 Firm 9 24

25 Firms enter to earn profit so supply increases in the industry rice Returns to $15 S S 1 $20 $20 $15 $15 MR 1 =D 1 MR=D D 1 D Industry 8 Firm 9 25

26 Back to Long-Run Equilibrium The only thing that changed from long-run to long-run is quantity in the industry S 1 $15 $15 MR=D D 1 D 7000 Industry 8 Firm 26

27 V. Efficiency 27

28 URE COMETITION AND EFFICIENCY In general, efficiency is the optimal use of societies scarce resources erfect Competition forces producers to use limited resources to their fullest. Inefficient firms have higher costs and are the first to leave the industry. erfectly competitive industries are extremely efficient There are two kinds of efficiency: 1. roductive Efficiency 2. Allocative Efficiency 28

29 Bikes Efficiency Revisited Which points are productively efficient? Which are allocatively efficient? A B E G C D F roductive Efficient combinations are A through D (they are produced at the lowest cost) Computers Allocative Efficient combinations depend on the wants of society 29

30 roductive Efficiency The production of a good in a least costly way. (Minimum amount of resources are being used) Graphically it is where rice = Minimum 30

31 rice rofit Short-Run D=MR Notice that the product is NOT being made at the lowest possible cost ( not at lowest point). uantity 31

32 rice Short-Run Loss D=MR Notice that the product is NOT being made at the lowest possible cost ( not at lowest point). uantity 32

33 rice Long-Run Equilibrium D=MR Notice that the product is being made at the lowest possible cost (Minimum ) uantity 33

34 Allocative Efficiency roducers are allocating resources to make the products most wanted by society. Graphically it is where rice = Why? rice represents the benefit people get from a product. 34

35 rice Long-Run Equilibrium MR Optimal amount being produced The marginal benefit to society (as measured by the price) equals the marginal cost. uantity 35

36 rice What if the firm makes 15 units? $5 MR The marginal benefit to $3 society is greater the marginal cost. Not enough produced. Society wants more Underallocation uantity of resources 36

37 rice What if the firm makes 22 units? $7 $5 MR The marginal benefit to society is less than the marginal cost. Too much roduced. Society wants less Overallocation of uantity resources 37

38 rice Long-Run Equilibrium D=MR = Minimum = EXTREMELY EFFICIENT!!!! uantity 38