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AP Economics

AP Economics

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AP Economics

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  1. AP Economics Mr. Bernstein Module 60: Long-Run Outcomes in Perfect Competition November 13, 2013

  2. AP EconomicsMr. Bernstein The Industry Supply Curve • In Perfect Competition, there are many small firms producing identical products • Each has an identical Short-Run cost curve, which is the MC curve above the shutdown point (AVC) • As P rises, output rises along the MC curve

  3. AP EconomicsMr. Bernstein The Industry Supply Curve • The sum of each firm’s output on their Short-Run supply curve is the Industry Short-Run Supply Curve

  4. AP EconomicsMr. Bernstein Long-Run Equilibrium • In Perfect Competition, firms earn a normal profit • But profits and losses occur in the short run… • …those profits and losses do not last, through a process of adjustment

  5. AP EconomicsMr. Bernstein The Long-Run Process of Adjustment • When profits exist in the short run • The market sees entry of new firms • More producers in the market shift the short-run market supply curve to the right • The price begins to fall in the market • As the price falls, each firm produces less along their MC curve • Profits for each firm fall • When the price reaches the break-even point at the minimum of ATC, entry stops

  6. AP EconomicsMr. Bernstein The Long-Run Process of Adjustment • When losses exist in the short run • Firms exit • Fewer producers in the market shift the short-run market supply curve to the left • The price begins to rise in the market • As the price rises, each firm produces more along their MC curve • Losses for each firm fall • When the price reaches the break-even point at the minimum of ATC, exit stops

  7. AP EconomicsMr. Bernstein The Long-Run Process of Adjustment At P = $8, P > ATC, profit, firms enter, Supply shifts right, P falls, firm Q falls …(notice we are presenting the market graph and firm graph side-by-side)

  8. AP EconomicsMr. Bernstein Long-Run Industry Supply Curves

  9. AP EconomicsMr. Bernstein Long-Run Industry Supply Curves • Constant Cost Industry – Supply curve is horizontal • Increasing Cost Industry – more realistic – costs rise as competitors enter (bidding for resources, increase in advertising, etc.) • Decreasing Cost Industry – Supply Curve is downward sloping – it is possible for input costs to decrease as an industry grows (ie electric cars)

  10. AP EconomicsMr. Bernstein Efficiency in Long-Run Equilibrium in Perfect Competition • Productive Efficiency: ATC is at minimum • Allocative Efficiency: P = MC • All firms earn normal profit in long run • Revenues cover costs AND next best alternative • So no existing firms exit and no new firms wish to enter • No Deadweight Loss, all mutually beneficial transactions are made • We will compare this to outcomes in other market structures