Download Competition and Equilibrium in Perfect Competition Markets and more Exams Economics in PDF only on Docsity! 1 Economics 101 – Section 5 Lecture #19 – Tuesday, March 30, 2004 Chapter 8 -Competition in the Short-Run -Competition in the Long-Run -Technology in the Long-run Lecture Overview NOTE: Exam #3 Thursday April 8th Including material since last midterm up to an including the material for next Tuesday. Finish up wheat example from last day Competition and short-run equilibrium Long-run equilibrium Entry and exit from the industry and the long-run The role of technology Start on monopoly Figure 5 Deriving the Market Supply Curve Bushels per Year Dollars 0.50 1,000 2,000 4,000 5,000 7,000 1.00 2.00 $3.50 2.50 0.50 1.00 2.00 $3.50 2.50d MR2 2= d MR3 3= d MR4 4 = d MR5 5 = MC ATC d MR1 1= AVC (a) Firm Market Supply Curve Bushels per Year Price per Bushel 200,000 400,000 500,000 700,000 (b) Market Figure 6 Perfect Competition Individual Demand Curve Quantity Demanded at Different Prices Market Demand Curve Quantity Demanded by All Consumers at Different Prices Firm Supply Curve Quantity Supplied at Different Prices Market Supply Curve Quantity Supplied by All Firms at Different Prices Added Together Market Equilibrium P Q S D Actual Quantity Demanded by Each Consumer Actual Quantity Supplied by Each Firm Ma rke t Pr ice Market Price Added Together Competitive Markets in the SR What is going on for individual firms when there are changes in the market price? Would obviously think that as prices go down then firms are going to be worse off? Why? Because they are getting less $ How does this tie into their cost structure and all these graphs we have been using? Figure 7 Short-Run Equilibrium in Perfect Competition Bushels per Year Price per Bushel $3.50 S D1 (a) Market MC d1 Profit per Bushel at p = $3.50 ATC 7,000 Bushels per Year Dollars $3.50 (b) Firm 700,000 d 2 Loss per Bushel at p = $2 2.00 4,000 D2 2.00 400,000 2 Competitive markets in the Long-run (LR) What happens to firms that are making profits in the short-run? Those making losses? In short, if there is profit more firms will enter If there is loss, firms will exit the industry In a competitive market, economic profit and loss are the forces driving long-run change The expectation of continued economic profit causes outsiders to enter the market, the expectation of continued economic losses causes firms in the market to exit Competitive markets in the Long-run (LR) Long-run equilibrium If there were profits in the short-run (SR) then entry will shift the market supply to the right until profits are eroded If there were losses in the SR then exit will cause the market supply to shift left until there are no there are no longer any losses. FIGURE 8a From Short-Run Profit to Long-Run Equilibrium Bushels per Year Price per Bushel S1 D A 900,000 $4.50 With initial supply curve , market price is $4.50 . . . S1 FIGURE 8b From Short-Run Profit to Long-Run Equilibrium A d1 Bushels per Year Dollars 9,000 $4.50 ATC MC 5,000 . . . so each firm earns an economic profit FIGURE 8c From Short-Run Profit to Long-Run Equilibrium Bushels per Year Price per Bushel 1,200,000 2.50 S1 D A E S2 900,000 $4.50 Profit attracts entry, shifting the supply curve rightward . . . FIGURE 8d From Short-Run Profit to Long-Run Equilibrium A d1 d2 Bushels per Year 5,000 9,000 2.50 $4.50 ATC MC . . . until market price falls to $2.50 and each firm earns zero economic profit
