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ECO100 - NOV 5 Rent Control, Monopoly

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James Pesando

Perfectly Competitive Markets. 3. Rent Controls Revisited What happens in a market place when there are no rent control and there is an increase in demand ● Short Term ○ Increase in price ○ Economic profits are earned by existing landlords ● Long Term? ○ Attracted by existing landlord, new firms enter (new apartments built); no barrier to entry ○ Prices decline, and economic profits are eliminated ○ End up with more rental accommodation, at no increase in price (if long-run industry cost curve is horizontal) ■ More apartments be built, prices will be driven down, economic profits will be eliminated, if this is a constant cost industry, there will be no increase in price. ● Constant cost industry: cost curve of new firms are the same as those of existing firms => back to original price. Increase in demand: With Rent controls ● Increase in demand but the price is not allowed to increase ● Initial price as a price ceiling ● No increase in supply ● What happens both in the short run and the long run Long Run Industry Supply Curve ● Initial equilibrium: 10,000 firms, in long run equilibrium ○ Profit maximizing, P = $20 = MC, zero economic profit, = (minimum) ATC ● Demand increases, market price increases (from 20 to 25) ○ These 10,000 firms will start to earn economic profits. P>MC ● Will lead to 1,000 NEW firms entering the industry Case 1: New firms have identical cost schedules as existing firms. ● In long run, P=20=minimum (unchanged) ATC. ○ Will return to 20 in order to correspond with zero economic profit. ● 10,000 “old” firms and 1,000 “new” firms earn zero economic profits ● Long run industry supply is horizontal ○ Cost schedule of new firms is identical with existing firms Case 2: The MC of “new” firms are $2 higher, so ATC is $2 higher ● In long run, P=22= minimum (ATC) of “new” firms. ○ Falls back to only 22 since that is the minimum ATC ● 10,000 “old” firms will earn economic profits. ATC is only 20. ● 1,000 “new” firms earn zero economic profit. ○ higher cost schedule. ○ competitive force will eliminate their economic profit. ● it is in long-run equilibrium since no “new” firms enter or exit industry. ● long-run industry supply curve is upward-sloping ● Insight: ○ 1) new firms may -for example- have to pay higher wages. ○ 2) We need only to “track” the (minimum) ATC of “new” firms that entered the industry to identify long-run industry supply curve if demand increases. Monopoly 1. Definition ● Single seller: of product with no close substitutes ● There is Barrier t
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