Micro Unit 3 Chapter 3

In the long run there are:

no fixed costs, only total cost curve and average cost curve

The long run in pure competition (1/3)

Firms can expand or contract capacity

The long run in pure competition (2/3)

Firms can enter or exit the industry

The long run in pure competition (3/3)

Everything is variable (no fixed costs)

Profit maximization in the long run

* Easy entry and exit
* Identical costs
* Constant-cost industry

Easy entry and exit

The only long-run adjustment we consider (firms either leave or exit)

Identical costs

All firms in the industry have identical costs

Constant cost industry

Entry and exit of firms do not affect resource prices (cost curves do not go up or down as firms enter and exit)

Long Run Adjustment Process (1/5)

Firms seek profits and shun losses (If one firm is making a profit, another firm will attempt to enter into that market too)

Long Run Adjustment Process (2/5)

Firms are free to enter or to exit

Long Run Adjustment Process (3/5)

Production will occur at firm’s minimum average total cost

Long Run Adjustment Process (4/5)

Price will equal minimum average total cost

Long Run Adjustment Process (5/5)

Triple equality: MC \= MR \= Min- ATC

Long run equilibrium

Entry eliminates profits, exit eliminates losses

Entry eliminates profits

* Firms enter
* Supply increases
* Price falls

Exit eliminates losses

* Firms leave
* Supply decreases
* Price rises

Pure competition and efficiency

Productive efficiency, allocative efficiency, triple equality

Productive efficiency

You can not produce in a more efficient way Producing where P \= minimum ATC

Allocative efficiency

Price of good is equal to cost of producing good Producing, where P \= MC

Triple equality

P \= MC \= minimum ATC

Long run supply curves

Constant cost industry, increasing-cost industry, decreasing cost industry

In a Constant cost industry (for supply curves)

* Entry/exit does not affect LR ATC
* Constant resource prices
* Special case

In a Increasing-cost industry (for supply curves)

* most industries
* LR ATC increases with expansion (More firms enter, costs go up)

Decreasing-cost industry

Cost decreases in this industry

Dynamic Adjustments

* Changes in consumer tastes
* resource supplies
* technology
* innovation
* Creative destruction

Pure competition in the long run graph

picture

Entry eliminates economic profits (picture)

picture

Exit eliminates losses (picture)

Picture

Productive effiency is

what most firms use. Any increase of one product leads to a decrease of another. Think of the curve.

Allocative efficiency is

The best possible combination of productive efficiency goods. The combination society wants the most.

In perfect competition there are

* A very large number of sellers
* a standardized product
* Easy entry and exit
* Price takers (accept the price no discussion)

Economic profit is where

MC meets MRDARP, down to ATC

Economic loss is where

MC meets MRDARP, up to ATC

If AVC is above MRDARP the firm should

Totally shutdown

Four market models

* Perfect competition
* pure monopoly
* monopolistic competition
* Oligopoly

Marginal Product Formula

change in total product / change in labor input

Average product formula

Total product / units of labor

Law Of Diminishing Returns

as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other variables remain at a constant.

Minimum Efficient Scale

Lowest level of output at which long run average costs are minimized

Pure competition is perfectly elastic because

price takers

Firms can still produce at a loss because

producing adds more to revenue then costs