McConnell 22nd edition

1. CHAPTER 11
Pure Competition in the Long Run

2. The Long Run in Pure Competition
The Long-Run Adjustment Process in Pure Competition
Long-Run Supply Curves
Pure Competition and Efficiency
Technological Advance and Competition
11-2
Chapter Contents

3. The Long Run in Pure Competition
• In the long-run
• Firms can expand or contract fixed resources
• Firms can enter or exit the industry
• Assumptions
• Identical costs: All firms in the industry have identical costs
• Firms are already at optimal fixed resources: No change in short-run cost
curves.
• Only effects of entry & exit will be considered.
• Firms make decisions based on the incentives of profits or
losses.LO11.1 11-3

4. Effect of Entry and Exit
• When firms enter the market
• Total output in the market increases & market supply increases
• Price falls in market
• When firms exit the market
• Total output in the market decreases & market supply
decreases
• Price rises in market
• Constant-cost industry: Entry and exit of firms does not
affect resource prices
11-4

5. Long-Run Adjustment Process (Profit in SR)
• In short run, firms make economic profits
• Firms enter market or Existing firms expand business
operations
• Market supply increases
• Market price falls
• Firm’s demand (MR) curve shifts down
• Eventually, all firms make zero economic profits
• Firms’ entry stops
LO11.2 11-5

6. Short-run Profits and the Reestablishment of
Long-run Equilibrium
ATC
MR
MC
D1
S1
D2
S2
0 100 q
(a)
Single firm
(b)
Industry
$60
50
40
0 90,000 100,000 110,000 Q
P
• Originally, there are 1,000 firms in the
market. The market demand is at D1 and
the equilibrium price is $50. Each firm
produces 100 units (total of 100,000 units
in market) and makes zero economic
profit.
• When the market demand increases to
D2, the equilibrium price increases to $60
and each firm increases production to 105
units (total of 105,000 units in market),
making economic profits (P>ATC) in short
run.
• In long run, 100 firms enter the market to
seek profits (1,100 firms in the market)
and shift the market supply curve to S2,
decreasing the equilibrium price to $50.
Each firm decreases production to 100
units (total of 110,000 units in market)
and makes zero economic profit.
11-6
LO11.2
$60
50
40
P

7. Long-Run Adjustment Process (Loss in SR)
• In short run, firms make economic losses
• Firms exit market or Existing firms contract business
operations
• Market supply decreases
• Market price rises
• Firm’s demand (MR) curve shifts up
• Eventually, all firms make zero economic profits
• Firms’ exit stops
LO11.2 11-7

8. Short-run Losses and the Reestablishment of
Long-run Equilibrium
11-8
ATC
MR
MC
$60
50
40
D3
S3
D1
S1
$60
50
40
(a)
Single firm
(b)
Industry
P P
q Q0 0100 90,000 100,000
• Originally, there are 1,000 firms in the
market. The market demand is at D1
and the equilibrium price is $50. Each
firm produces 100 units (total of
100,000 units in market) and makes
zero economic profit.
• When the market demand decreases
to D3, the equilibrium price falls to
$40 and each firm decreases
production to 95 units (total of 95,000
units in market), making economic
losses (P<ATC) in short run.
• In long run, 100 firms exit the market
to seek better opportunities (900
firms in the market) and shift the
market supply curve to S3, raising the
equilibrium price to $50. Each firm
increases production to 100 units
(total of 90,000 units in market) and
makes zero economic profit.
LO11.2

9. Long-Run Equilibrium
• In long run equilibrium
• Firms make zero economic profit
• No more entry to or exit from market (market supply
curve stops moving)
• Production will occur at firm’s minimum average total cost
• Price will equal minimum average total cost
• Each firm is maximizing its profit (MR=MC)
LO11.2 11-9

10. Long-Run Supply Curve
• Long-run Market Supply Curve can
be found by tracing long-run
equilibrium points in market.
• It can be upward, flat, or downward
sloping.
• Short-run market supply curve is a
sum of short-run individual firm’s
supply curve (MC curve above
minimum AVC)
• It is always upward-sloping due to
diminishing marginal returns.
11-10
D1
S1 (SR Supply)
D2
S2 (SR Supply)
(b)
Industry
$60
50
40
0 90,000 100,000 110,000 Q
P
LR Equilibrium
LR Equilibrium
SR Equilibrium
LR Supply

11. LR ATC and Long-Run Equilibrium
• In long run all purely competitive firms must produce at the
minimum long-run average total cost (LR ATC). Any firms
operating at higher costs will be eliminated from competition.
• Long-run equilibrium price is equal to the minimum LR ATC of
firm (for zero economic profit).
• Firm’s minimum LR ATC increases (decreases) when firm’s LR
ATC curve shifts up (down).
• Firm’s LR ATC curve may shift up or down if total production in
industry (expansion or contraction of industry) affects
prices of resources.
11-11

12. Types of Long-Run Supply Curves
• Constant-cost industry : LR supply curve is flat.
• An expansion of industry (increase in industry total output) does not affect LR ATC
• Constant resource prices
• Increasing-cost industry : LR supply curve is upward-sloping.
• LR ATC increases with expansion of industry
• Specialized or limited resources (Resource industry operates under decreasing
returns to scale)
• Decreasing-cost industry : LR supply curve is downward-sloping.
• LR ATC decreases with expansion of industry
• Network effect & Industry cluster (Resource industry operates under increasing
returns to scale)
LO11.3 11-12

13. Long-run Supply Curves
LO11.3 11-13
Constant-cost Industry Increasing-cost Industry Decreasing-cost Industry

14. Pure Competition and Efficiency
• In the long run, efficiency is achieved in purely competitive
market.
• Productive efficiency
• Producing where P = minimum ATC
• Products are produced at the lowest cost
• Allocative efficiency
• Producing where P = MC = MB (Equilibrium)
• Produce a quantity of products that consumers want (value)
• Consumer surplus and producer surplus are maximized.
LO11.4 11-14

15. P MR
D
S
Qe
Qf
ATC
MC
P = MC = minimum
ATC (normal profit)
P
Consumer
surplus
Producer
surplus
Price
Price
Quantity
(a) Single firm
Quantity
(b) Market
0
0
Long-run Equilibrium: A Competitive Firm and Market
LO11.4 11-15

16. Dynamic Adjustments
• Purely competitive markets will automatically
adjust to
• Changes in consumer tastes.
• Resource supplies.
• Technology.
LO11.4 11-16

17. Technological Advance and Competition
• Entrepreneurs would like to increase profits beyond
just a normal profit
• Decrease costs by innovating
• New product development
• New production method development
• New marketing & management method & organization
development
• New resource development
LO11.5 11-17

18. Creative Destruction
• Competition and innovation may lead to “creative
destruction”
• Creation of new products, methods, and business
models may destroy the old products, methods, and
business models
• Streaming video service replaced DVDs and DVD rentals
• MS Word replaced typewriters
• Online stores replaced Brick-and-mortar stores
LO11.5 11-18