Chapter 11Pure Competition in the Long Run

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11-2

The Long Run in Pure Competit ion

• In the long-run• Firms can expand or contract capacity• Firms can enter or exit the industry

LO1

11-3

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 of firms do not affect

resource prices

LO1

11-4

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

LO2

11-5

Long Run Equil ibrium

• Entry eliminates profits• Firms enter• Supply increases• Price falls

• Exit eliminates losses• Firms leave• Supply decreases• Price rises

LO2

11-6

Entry Eliminates Economic Profits

LO3

ATC

MR

MC

$60

50

40

D1

S1

D2

$60

50

40

S2

LO2

11-7

Exit Eliminates Losses

ATC

MR

MC

$60

50

40

D3

S3

D1

$60

50

40

S1

LO2

11-8

Long Run Supply Curves

• Constant-cost industry• Entry/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 industryLO3

11-9

LR Supply: Constant-Cost Industry

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

$50 SZ1 Z2Z3

D3 D1 D2

LO3

11-10

LR Supply: Increasing-Cost Industry

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

$50P1

S

Y1

Y2

Y3

D3

D1

D2

$45

$55P2

P3

LO3

11-11

LR Supply: Decreasing-Cost Industry

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

$50P1

S

X1

X2

X3

D3

D1

D2

$45

$55P3

P2

LO3

11-12

Pure Competit ion 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 maximizedLO4

11-13

Pure Competit ion and Efficiency

P MR

D

S

QeQf

ATC

MCP=MC=MinimumATC (normal profit)

P

Consumer surplus

Producer surplus

LO4

11-14

Dynamic Adjustments

• Purely competitive markets will automatically adjust to:• Changes in consumer tastes• Resource supplies• Technology

• Recall the “Invisible Hand”

LO4

11-15

Technological Advance and Competit ion

• Entrepreneurs would like to increase profits beyond just a normal profit• Decrease costs by innovating• New product development

LO5

11-16

Creative Destruction

• Competition and innovation may lead to “creative destruction”

• Creation of new products and methods may destroy the old products and methods

LO5

11-17

A Patent Failure?

• Patents give the inventor exclusive rights to market and sell their product for 20 years

• May hinder “creative destruction”• Eliminate patents on complicated, hard to

copy products• Speed up innovation by increasing the

opportunities of potential new competitors