Chapter 11

Pure Compe**on in
the Long Run

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The Long Run in Pure Competition

In the long-run
Firms can expand or contract capacity
Firms can enter or exit the industry

LO1

11-2

Profit Maximization in the Long

Run
Easy entry and exit
The only long-run adjustment we consider
Iden@cal costs
All rms in the industry have iden@cal costs
Constant-cost industry
Entry and exit of rms do not aect
resource prices
LO1

11-3

Long Run Adjustment Process

Adjustment process in pure compe@@on
Firms seek prots and shun losses
Firms are free to enter or to exit
Produc@on will occur at rms minimum
average total cost
Price will equal minimum average total cost

LO2

11-4

Long Run Equilibrium

Entry eliminates prots
Firms enter
Supply increases
Price falls
Exit eliminates losses
Firms leave
Supply decreases
Price rises
LO2

11-5

Entry Eliminates Economic Profits

P

S1

MC
ATC

$60
50

MR

40

LO2

50

D2

40

100

(a)
Single rm
LO3

S2

$60

D1

80,000

90,000

100,000

(b)
Industry
11-6

Exit Eliminates Losses

P

S3

MC
ATC

$60
50

MR

D1
D3

100

(a)
Single rm
LO2

50
40

40

S1

$60

80,000

90,000

100,000 Q

(b)
Industry
11-7

Pure Competition and Efficiency

In the long run, eciency is achieved
Produc*ve eciency
Producing where P = minimum ATC
Alloca*ve eciency
Producing where P = MC
Triple equality
P= MC= minimum ATC
Consumer surplus and producer surplus are
maximized
LO4

11-8

Pure Competition and Efficiency

Single Firm
P=MC=Minimum
ATC (normal prot)

Market

MC

Consumer
surplus

Price

Price

ATC

MR P

Producer
surplus

D
0

Qf
Quan*ty

LO4

Qe
Quan*ty

11-9

Technological Advance and

Competition
Entrepreneurs would like to increase prots
beyond just a normal prot
Decrease costs by innova@ng
New product development

LO5

11-10