Lecture 16-Perfect Competition Revisited

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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?
OR
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
OR
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
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Long Run
Industry SS
Q
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Long Run
Industry SS
Q
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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.

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