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Lecture 16

Lecture 16-Perfect Competition Revisited

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Department
Economics
Course
ECO101H1
Professor
Jack Carr
Semester
Fall

Description
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 >³&RQVWDQW&RVW´,QGXVWU\@ Case #2: New Entrants have higher costs P Long Run Industry SS Q P Long Run Industry SS Q www.notesolution.com Observations: (1) Existing firms can earn economic profits (since new entrants have higher ATC schedules) (2) Example: Firms obtain granite from large quarry. Firms closer to town have lower transportation costs. Firm: Short-run Supply Curve SS = MC (unless P < AVC) Long-Run Supply Curve SS = MC (unless P < ATC) [in long run, if firm is suffering economic losses, will leave industry] Industry: Short-run Supply Curve 66 VXPRIILUPV¶0&VFKHGXOHV Long-Run Supply Curve SS = minimum ATC of new firms [= minimum ATC of representative firm if firms have identical costs] Perfectly Competitive Markets: Rent Controls (Revisited) 1. Increase in Demand: No Rent Controls Short-term x Increase in price x Economic profits Long-term x New firms enter (new apartment built) x Price decline, and economic profits are eliminated x More rental accommodation, at no increase in price (if long run industry cost curve is horizontal) 2. Increase in Demand: Rent Controls www.notesolution.com No Rent Controls Rent Controls (Imposed at Initial Equilibrium Price) Example: A perfectly competitive industry is in long-term equilibrium. The government imposes a licensing fee of $1,000 on each firm in the industry. Show what happens, in the short-run and in the long-run, to market price and output? Insights: Licensing fee Ù lump sum tax (does not vary with output) Æ MC (and AVC) unchanged Æ ATC (=AFC + AVC) is changed Long Run (Constant Cost Industry) Q0 SS DD Q1 P0 Short Run SS DD SS1 P1 Q0 DD1 Q01 DD1 (new firms enter) P0 Q0 DD P0 Excess Demand SS1 DD1 www.notesolution.comPerfect 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 New firms have same cost structures as existing firms Upward-Sloping New firms bid up cost of factors of production for all firms OR
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