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, =
● 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
● 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
○ 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.
● Single seller: of product with no close substitutes
● There is Barrier t