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November 1, 2013

November 1, 2013. Collect Current Event PC in the SR Graphing Warm-Up Begin Ch.9: PC in the LR HW: Read Chapter 9 Ch 8/9 Quiz Wednesday AP Econ Review Session will be next MONDAY. Pure Competition in the Short Run Graphing Practice.

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November 1, 2013

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  1. November 1, 2013 • Collect Current Event • PC in the SR Graphing Warm-Up • Begin Ch.9: PC in the LR • HW: Read Chapter 9 Ch 8/9 Quiz Wednesday AP Econ Review Session will be next MONDAY

  2. Pure Competition in the Short RunGraphing Practice • Create a large graph using a majority of your graph paper (x and y axis) • Label the following 3 cost curves for a typical firm MC, ATC, AVC • MC curve crosses ATC and AVC and their respective minimum points!!!

  3. Graphing in the SR cont… • Create the following 5 MR Curves and label the following points : • Shut-down quantity and price point on the curve • Shut-down point on the curve • Loss minimizing (shade in economic loss) • Break-Even (normal profit) • Maximizing profit (shade in economic profit)

  4. November 4, 2013 • Crash Course: Chapter 9- PC in the LR • Chapter 9 Practice Quiz Chapter 8/9 Quiz Wednesday, November 6! Review Session Today: 2:45-3:45!!!

  5. Chapter 9:Pure Competition in the Long Run

  6. The Long Run in Pure Competition • In the LR: • Firms can expand or shrink capacity • Firms can enter and exit the industry (based on profits or losses) • Remember: No barriers to entry… • Profits attract new firms & losses shun them… • Profits=more firms=greater supply=lower price… • Losses=less firms=less supply=higher price • Long Run equilibrium: Always at firms’ lowest ATC!!! 9-7 LO1

  7. P P 0 0 q 90,000 100,000 110,000 100 Q (a) Single Firm (b) Industry Shift in Demand=change equilibrium=profit=new firms enter= increase supply=lower price=economic profit back to zero Entry Eliminates Economic Profits S1 MC $60 50 40 $60 50 40 ATC S2 MR D2 D1 9-8 LO3

  8. P P 0 0 q 80,000 90,000 100,000 100 Q (a) Single Firm (b) Industry Exit Eliminates Losses Shift in demand=losses=firms exit=supply less=increase price=losses disappear S3 MC $60 50 40 $60 50 40 ATC S1 MR D1 D3 9-9 LO3

  9. Long Run Supply Curves: • Constant cost industry • Entry/exit of firms does not affect the prices of factors of production (therefore does not affect LR ATC) • LR Supply Curve is perfectly elastic • Increasing cost industry • The entry of new firms bids up the prices of factors of production and thus increases production costs (LR ATC SHIFTS UPWARD with expansion)…price will rise as well. • LR Supply Curve is up-sloping. • Decreasing cost industry • An industry in which production costs fall as firms enter, ATC SHIFTS DOWNWARD, price drops. • LR Supply Curve is down-sloping. 9-10 LO4

  10. P P1 P2 P3 0 Q LR Supply: Constant-Cost Industry S $50 Z3 Z1 Z2 D1 D2 D3 Q2 Q1 Q3 90,000 100,000 110,000 9-11 LO4

  11. P 0 Q LR Supply: Increasing-Cost Industry S P2 $55 Y2 P1 $50 Y1 P3 $40 Y3 D2 D1 D3 Q2 Q1 Q3 90,000 100,000 110,000 9-12 LO4

  12. P 0 Q LR Supply: Decreasing-Cost Industry X3 P3 $55 X1 P1 $50 X2 P2 $40 S D3 D2 D1 Q2 Q1 Q3 90,000 100,000 110,000 9-13 LO4

  13. Pure Competition and Efficiency • In the long run, efficiency is achieved! • Productive efficiency : Producing where P = min. ATC • Allocative efficiency: Producing where P = MC • P=MC=MIN. ATC!!!!! 9-14 LO5

  14. Single Firm Market Price Price 0 0 Quantity Quantity Pure Competition and Efficiency P=MC=Minimum ATC (Normal Profit) MC Consumer Surplus S ATC P MR P Producer Surplus D Qf Qe 9-15 LO5

  15. Dynamic Adjustments • Purely competitive markets will automatically adjust to: • Changes in consumer tastes • Resource supplies • Technology • Recall the “Invisible Hand” 9-16 LO6

  16. Technological Advance: Competition • Entrepreneurs would like to increase profits beyond just a normal profit • Decrease costs by innovating • New product development 9-17 LO6

  17. Creative Destruction • Competition and innovation may lead to “creative destruction” • Creation of new products and methods destroys the old products and methods 9-18 LO6

  18. Efficiency Gains from Entry • Patent protected prescription drugs earn substantial economic profits for the pharmaceutical company. • Generic drugs become available as the patent expires on the existing drug. • Results in a 30-40% reduction price • Greater consumer surplus and efficiency 9-19

  19. Efficiency Gains from Entry a S b P1 c d f P2 D Q1 Q2 9-20

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