ECO101H1 Lecture 16: Lecture 16-Perfect Competition Revisited

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copperclam445

1 Aug 2010

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Perfect Competition Revisited

Long Run Industry Supply Curve

1. After economic profits are driven to zero by entry or exit, what is the relationship

between price and quantity supplied?

2. How does (minimum) ATC vary as the number of firms in the industry increases

or declines?

The Long-Run Industry Supply Curve

Horizontal Ù New firms have same cost structures as existing firms

Upward-Sloping Ù New firms bid up cost of factors of production for all firms

New firms are less efficient and have higher costs of

production

Case #1: All firms have identical cost schedules

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Case #2: New Entrants have higher costs

Long Run

Industry SS

Long Run

Industry SS

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Document Summary

Horizontal new firms have same cost structures as existing firms. Upward-sloping new firms bid up cost of factors of production for all firms. New firms are less efficient and have higher costs of production. Case #1: all firms have identical cost schedules. Observations: (1) existing firms can earn economic profits (since new entrants have higher atc schedules) (2) example: Firms closer to town have lower transportation costs. [in long run, if firm is suffering economic losses, will leave industry] [= minimum atc of representative firm if firms have identical costs: increase in demand: no rent controls. N price decline, and economic profits are eliminated. N more rental accommodation, at no increase in price (if long run industry cost curve is horizontal: increase in demand: rent controls www. notesolution. com. Example: a perfectly competitive industry is in long-term equilibrium. The government imposes a licensing fee of ,000 on each firm in the industry.

Related Questions

1. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

a. P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20.

b. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0.

c. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0.

d. P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0.

2. Describe the supply curve of a constant cost industry.

a. Upward sloping

b. Flat

c. Downward sloping, then upward sloping

d. Downward sloping

3. At the profit-maximizing output level P = MC, if P > AC then firms can earn an above-normal profit, causing entry into the industry. True or false?

4. In a competitive market, the amount of a good that is produced is such that social surplus is:

a. Minimized

b. Maximized

c. Zero

d. Hidden

magentabee19

The bicycle industry y is made up of 100 firms with the long-run cost curve c(y) = 2 + (y² /2) and 60 firms with the long-run cost curve c(y) = y² /10. No new firms can enter the industry. What is the long-run industry supply curve at prices greater than $2?