Pure Competition in the Long Run

The Long Run in Pure Competition

• In the long run, firms have the flexibility to:
  • Expand or contract capacity.
  • Enter or exit the industry based on profit incentives.

Long-Run Adjustment Process in Pure Competition

• Firms seek profits and avoid losses:
  • Decisions on entering or exiting are driven by profitability.
  • Production occurs at a firm's minimum average total cost (ATC).
  • Price equals minimum average total cost in equilibrium.

Profit Maximization in the Long Run

• Easy entry and exit are fundamental in this analysis:
  • Each firm experiences identical costs.
  • The industry is considered a constant-cost industry where entry and exit do not affect resource prices.

Long-Run Equilibrium Dynamics

• Entry eliminates profits:

  • New firms enter the market.
  • Supply (S) increases.
  • Price (P) falls due to increased competition.

• Exit eliminates losses:

  • Firms with losses exit the market.
  • Supply decreases, pushing the price back up.

Temporary Profits and Long-run Equilibrium

• Temporary profits lead to:

  • Increased attraction for new firms.
  • Adjustment in supply resulting in falling prices back to equilibrium.

• Temporary losses lead to:

  • Firms exiting the market.
  • Decrease in supply leading to price recovery.

Long-Run Supply Curves

• Types of Long-Run Supply Industries:

  • Constant-cost Industry:

  • Entry/exit does not affect long-run average total cost (LR ATC).

  • Resource prices remain steady.

  • Increasing-cost Industry:

  • LR ATC rises with expansion due to demand for specialized resources.

  • Decreasing-cost Industry:

  • LR ATC decreases as firms increase output.

Efficiency in Pure Competition

• In the long run, economies achieve efficiency by:

  • Producing at the point where the price equals minimum average total cost (P = minimum ATC).
  • Allocative efficiency is achieved when price equals marginal cost (P = MC).

• Triple equality condition:

  • P = MC = minimum ATC, indicating maximization of consumer and producer surplus.

Dynamic Adjustments in Competitive Markets

• Purely competitive markets naturally adjust to:
  • Changes in consumer preferences.
  • Fluctuations in resource supplies.
  • Technological advancements.

Technological Advances and Competition

• Entrepreneurs aim to achieve profits beyond normal profits:
  • Strategies include cost reduction through innovation and new product development.

Creative Destruction

• Innovation in competition can lead to "creative destruction":
  • Introduction of new products and methods may render older ones obsolete.

Conclusion: Role of Innovators

• Innovators like Elon Musk leverage systems engineering and innovative approaches (e.g., reusable rockets) to drive long-term competition.