Pure Competition: Long-Run Equilibrium, Efficiency, and Creative Destruction

Long-run adjustment in pure competition

In the long run, firms respond to economic profits by entering industries and to economic losses by exiting, leading to an equilibrium where firms earn zero economic profit and the market price equals the minimum of the average total cost (ATC).

Constant-cost industry

The long-run supply curve is horizontal, indicating that industry costs do not change as output expands, and input prices remain stable.

Increasing-cost industry

The supply curve is upsloping, reflecting rising input prices as industry output increases, which raises costs.

Decreasing-cost industry

The supply curve is downsloping, meaning that as industry output expands, input prices fall, reducing costs and encouraging further production.

Productive efficiency

Productive efficiency occurs when firms produce goods at the lowest possible average total cost (ATC), ensuring resources are used in the most cost-effective manner.

Allocative efficiency

Allocative efficiency is achieved when price (P) equals marginal cost (MC), ensuring that resources are allocated in accordance with consumer preferences.

Triple equality in long-run equilibrium

In long-run equilibrium under pure competition, P = MR = MC = minimum ATC, ensuring both productive efficiency and allocative efficiency.

Maximization of combined consumer and producer surplus

Pure competition maximizes the total benefit surpluses—the sum of consumer surplus and producer surplus—at the equilibrium output.

Consumer surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer surplus

The difference between the minimum price producers accept and the market price.

Dynamic adjustments in competitive markets

Competitive markets are self-correcting, adjusting supply in response to changes in demand, resource supplies, or technology.

Invisible hand

Describes how individual profit-seeking behavior leads to societal benefits in private goods markets without externalities.

Creative destruction

The process by which innovation and technological progress replace outdated products and firms, fueling economic growth.

Profit incentives for innovation

Firms are motivated to innovate by lowering production costs through technological improvements and developing new products that capture market share.

Lowering production costs

Achieved through technological improvements, enabling higher profits if firms can produce at lower average total cost (ATC).

Developing new products

Allows firms to capture market share and charge higher prices temporarily.

Monopoly rights

Temporary rights provided by patents, typically lasting 20 years, to inventors.

Financial incentives

Encouragement for industries with easily replicable products, like pharmaceuticals, to invest in research and development (R&D).

Patent trolling

Entities that buy patents solely to sue others and collect royalties, without producing any goods.

Legal disputes

Large firms can use patent litigation to delay or block rivals, enabling old firms to tax new innovations.

Stifling creative destruction

Patents may prolong the survival of less efficient or outdated firms, slowing industry renewal and technological progress.

Efficiency costs of creative destruction

Includes displacement of workers in declining industries and job losses in communities dependent on specific industries.

Short run in pure competition

Firms may earn profits or incur losses due to fixed plant sizes.

Long run in pure competition

Entry and exit of firms eliminate profits or losses, leading to zero economic profit and efficient outcomes.

Long-run supply curve

The industry supply curve reflecting how industry costs change with output.