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Chapter 9

econ

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Chapter 9

  1. 1. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University Perfect Competition CHAPTER 1© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  2. 2. Market Structure • Market structure –All the characteristics of a market that influence how trading takes place • Four basic kinds of market structure –Perfect competition –Monopoly –Monopolistic competition –Oligopoly 2 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  3. 3. What Is Perfect Competition? • Competition –A situation of diffuse, impersonal competition in a highly populated environment • Perfect competition 1. Large numbers of buyers and sellers 2. Sellers offer a standardized product 3. Sellers can easily enter into or exit from the market 4. Buyers and sellers are well-informed 3 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  4. 4. What Is Perfect Competition? • Large number of buyers and sellers –No individual decision maker can significantly affect the price of the product by changing the quantity it buys or sells • Standardized product offered by sellers –Buyers do not perceive differences between the products of one seller and another 4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  5. 5. What Is Perfect Competition? • Easy entry into and exit from the market –No significant barriers or special costs to discourage new entrants –No barriers to exit • Well-informed buyers and sellers –Buyers and sellers have all information relevant to their decision to buy or sell 5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  6. 6. What Is Perfect Competition? • Is perfect competition realistic? –Yes: the market for wheat –Other markets, one or more of the assumptions of perfect competition will not be met –The model of perfect competition is powerful –Many markets, while not strictly perfectly competitive, come reasonably close 6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  7. 7. The Perfectly Competitive Firm • A perfectly competitive firm –Faces a demand curve that is horizontal (perfectly elastic) at the market price –Price taker • Treats the price of its product as given and beyond its control 7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  8. 8. Figure The Competitive Industry and Firm 8 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Price per Ounce Ounces of Gold per Day (a) Market Price per Ounce Ounces of Gold per Day (b) Firm D S $800 $800 d Demand Curve Facing the Firm 1. The intersection of the market supply and the market demand curves . . . 2. determines the equilibrium market price. 3. The typical firm can sell all it wants at the market price . . . 4. so it faces a horizontal demand curve.
  9. 9. The Perfectly Competitive Firm • Total revenue (TR) curve –Straight line that slopes upward –Slope of the TR curve = the price of output • Marginal revenue (MR) curve –Horizontal line at the market price –MR = the market price –Same as the demand curve facing the firm 9 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  10. 10. Table Cost and Revenue Data for Small Time Gold Mines 10 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1
  11. 11. Figure Panel (a) shows a competitive firm’s total revenue (TR) and total cost (TC) curves. TR is a straight line with slope equal to the market price. Profit is maximized at 7 ounces per day, where the vertical distance between TR and TC is greatest. Panel (b) shows that profit is maximized where the marginal cost (MC) curve intersects the marginal revenue (MR) curve, which is also the firm’s demand curve. Profit Maximization in Perfect Competition 11 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Dollars Output21 43 5 6 7 98 10 Dollars Output21 43 5 6 7 98 10 MC TR $5,600 4,200 TC 1,100 d=MR$800 Slope = 800 Maximum Profit per Day = $1,400 (a) (b)
  12. 12. The Perfectly Competitive Firm • Marginal cost (MC) –First falls and then rises • Total cost –Rises first at a decreasing rate and then at an increasing rate • Total profit = TR + TC • Profit-maximizing output –Where the MC curve crosses the MR curve from below 12 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  13. 13. The Perfectly Competitive Firm • Profit per unit = P – ATC • Firm earns profit: P > ATC • Firm suffers a loss: P < ATC • Total profit (or loss) –At the best output level –Area of a rectangle • Height = distance between P and ATC • Width = quantity of output 13 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  14. 14. Figure The competitive firm in panel (a) produces where marginal cost equals marginal revenue, or 7 units of output per day. Profit per unit at that output level is equal to revenue per unit ($800) minus cost per unit ($600), or $200 per unit. Total profit (indicated by the blue-shaded rectangle) is equal to profit per unit times the number of units sold, $200 × 7 = $1,400. Measuring Profit or Loss (a) Economic Profit 14 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Dollars Ounces of Gold per Day 21 43 5 6 7 98 10 d=MR$800 ATC Profit per Ounce ($200) MC 600
  15. 15. Figure In panel (b), we assume that the market price is lower, at $400 per ounce. The best the firm can do is to produce 5 ounces per day and suffer a loss shown by the red area. It loses $200 per ounce on each of those 5 ounces produced, so the total loss is $1,000—the area of the red- shaded rectangle. Measuring Profit or Loss (b) Economic Loss 15 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Dollars Ounces of Gold per Day 21 43 5 6 7 98 10 d=MR$400 ATC Loss per Ounce ($200) MC 600
  16. 16. The Perfectly Competitive Firm • Shut down if –TR < TVC –P < AVC • Shutdown price –The price at which a firm is indifferent between producing and shutting down 16 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  17. 17. The Perfectly Competitive Firm • Firm’s short-run supply curve –A curve that shows the quantity of output a competitive firm will produce at different prices –Is its MC curve for all prices above minimum AVC • For all prices below minimum AVC, the firm will shut down 17 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  18. 18. Figure Panel (a) shows a typical competitive firm facing various market prices. For prices between $2 and $7 per bushel, the profit-maximizing quantity is found by sliding along the MC curve. Below $2 per bushel, the firm is better off shutting down, because P < AVC. Panel (b) shows the firm’s supply curve, which is the same as its MC curve for all prices above the shutdown price of $2 per bushel. Short-Run Supply under Perfect Competition 18 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Dollars Bushels per Year (a) Price per Bushel Bushels per Year (b) $7 d1=MR1 MC ATC AVC 5 d2=MR2 2 d4=MR4 4 d3=MR3 1 d5=MR5 7,000 5,000 4,000 2,000 1,000 $7 5 2 4 1 7,000 5,000 4,0002,000 Firm’s Supply Curve
  19. 19. Competitive Markets in the Short Run • In the short run –The number of firms in the industry is fixed • Market supply curve –A curve indicating the quantity of output • That all sellers in a market will produce • At different prices • In the short run –Add up the quantities of output supplied by all firms in the market at each price 19 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  20. 20. Figure Deriving the Market Supply Curve 20 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Dollars Bushels per Year (a) Firm Price per Bushel Bushels per Year (b) Market $7 AVC 5 2 4 7,000 5,000 4,000 2,000 $7 5 2 4 1 700,000 500,000 400,000 200,000 Market Supply Curve Firm’s Supply Curve 1 1. At each price . . . 2. the typical firm supplies the profit-maximizing quantity. 3. The total supplied by all firms at different prices is the market supply curve
  21. 21. Competitive Markets in the Short Run • Short run equilibrium –Economic profit • If P > ATC –Economic loss • If AVC < P < ATC 21 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  22. 22. Figure Perfect Competition 22 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6
  23. 23. Figure Short-Run Equilibrium in Perfect Competition 23 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Price per Bushel Bushels per Year Dollars Bushels per Year $7 4 MCS 1. When the demand curve is D1 and market equilibrium is here . . . 3. If the demand curve shifts to D2 the market equilibrium moves here . . . 4. and the typical firm operates here, suffering a short-run loss. D1 700,000 $7 d1=MR1 4 d2=MR2 ATC 7,0004,000 2. the typical firm operates here, earning economic profit in the short run. D2 400,000 Profit per Bushel at p =$7 Loss per Bushel at p =$4
  24. 24. Competitive Markets in the Short Run • Perfect competition –Market • Sums up the buying and selling preferences of individual consumers and producers • Determines the market price –Each buyer and seller • Takes the market price as given • Able to buy or sell the desired quantity 24 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  25. 25. Competitive Markets in the Long Run • Long run –New firms can enter a competitive market • Expectations of continued economic profit • Positive economic profit continues to attract new entrants until economic profit is reduced to zero –Existing firms can exit the market • Expectations of continued economic loss • Economic losses continue to cause exit until the losses are reduced to zero 25 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  26. 26. Competitive Markets in the Long Run • Entry into a market –Entirely new firm enters a market –An existing firm adds a new product line –An existing firm creates a new branch (local market) • Exit from a market –Going out of business –A firm switches out of a particular product line, even as it continues to produce other things 26 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  27. 27. Competitive Markets in the Long Run • Short-run profit to long-run equilibrium –Short-run equilibrium • Economic profit, P > ATC –Long-run: attract new entrants • Market supply curve shifts rightward – Market price falls – Horizontal demand curve facing each firm shifts downward – Each firm will slide down its marginal cost curve, decreasing output • Until each firm is earning zero economic profit 27 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  28. 28. Figure From Short-Run Profit to Long-Run Equilibrium (a, b) 28 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Price per Bushel Bushels per Year Dollars Bushels per Year $9 S1 With initial supply curve S1, market price is $9 . . . so each firm earns an economic profit. D 900,000 A MC ATC 5,000 $9 d1 9,000 A
  29. 29. Figure From Short-Run Profit to Long-Run Equilibrium (c, d) 29 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Price per Bushel Bushels per Year Dollars Bushels per Year $9 S1 Profit attracts entry, shifting the supply curve rightward . . . until market price falls to $5 and each firm earns zero economic profit. D 900,000 A MC ATC $9 d1 9,000 A 5 d25 S2 1,200,000 E 5,000 E
  30. 30. Competitive Markets in the Long Run • Short-run loss to long-run equilibrium –Short-run equilibrium • Economic loss, P < ATC –Long-run: firms exit the market • Until each firm is earning zero economic profit • Zero economic profit (Normal profit) –Just enough accounting profit to cover implicit costs –Not the same as zero accounting profit 30 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  31. 31. Competitive Markets in the Long Run • Perfect competition and plant size –Long-run equilibrium: plant and output level that bring it to the bottom of its LRATC curve • In long-run equilibrium –The competitive firm operates where: MC = minimum ATC = minimum LRATC = P 31 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  32. 32. Figure Perfect Competition and Plant Size 32 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Dollars Output Per Period Dollars Output Per Period 1. With its current plant and ATC curve, this firm earns zero economic profit. LRATC P1 d1=MR1 ATC1MC1 q1 2. But the firm could earn positive profit with a larger plant, producing here. P* d2=MR2 LRATC ATC2MC2 q* E 3. As all firms increase plant size and output, market price falls to its lowest possible level . . . 4. and each earns zero economic profit, producing at minimum LRATC.
  33. 33. What Happens When Things Change? • Initial long-run equilibrium and market demand curve shifts rightward –Short-run • A rise in market price • A rise in market quantity • A rise in economic profits –Long-run: entry of new firms • Market supply shifts rightward • Drives down the price • Economic profit is eliminated 33 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  34. 34. What Happens When Things Change? • Constant cost industry –An industry in which the long-run supply curve is horizontal • Each firm’s cost curves are unaffected by changes in industry output • Long-run supply curve –A curve indicating price and quantity combinations in an industry –After all long-run adjustments have taken place 34 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  35. 35. What Happens When Things Change? • In a constant cost industry –In which industry output has no effect on individual firms’ cost curves –The long-run supply curve is horizontal –In the long-run, the industry will supply any amount of output demanded at an unchanged price 35 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  36. 36. Figure At point A in panel (a), the market is in long-run equilibrium. The typical firm in panel (b) operates at the minimum of its ATC and LRATC curves, and earns zero economic profit. The lower panels show what happens if demand increases. A Constant Cost Industry (a, b) 36 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Dollars Output per period (a) Dollars Output per period (b) P1 d1=MR1 LRATC ATC MC q1 A P1 S1 D1 Q1 A
  37. 37. Figure In the short run, the market reaches a new equilibrium at point B in panel (c), and the typical firm in panel (d) earns economic profit at the higher price PSR. In the long run, profit attracts entry, increasing market supply and lowering price. Entry continues until economic profit at the typical firm in panel (d) is reduced to zero, which requires the price to drop to P1, its original level. In panel (d), the typical firm returns to point A, and in panel (c), the new long-run market equilibrium is point C. The increase in demand raises output, but leaves price unchanged, as shown by the horizontal long-run supply curve connecting points A and C. A Constant Cost Industry (c, d) 37 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Dollars Output per period (c) Dollars Output per period (d) P1 d1=MR1 LRATC ATC MC q1 A P1 S1 D1 D2 QSR B PSR S2 SLR PSR dSR=MRSR qSR B Q2 C Q1 A
  38. 38. What Happens When Things Change? • Increasing cost industry –An industry in which the long-run supply curve slopes upward • Each firm’s LRATC curve shifts upward as industry output increases • In an increasing cost industry –A rise in industry output shifts up each firm’s LRATC curve, so that zero economic profit occurs at a higher price –The long-run supply curve slopes upward 38 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  39. 39. Figure Point A in both panels shows the initial long-run market equilibrium, with the typical firm earning zero economic profit. After demand increases, the market reaches a new short-run equilibrium at point B in panel (a). At the higher price, the typical firm earns economic profit (not shown). In the long run, profit attracts entry, supply increases and price begins to fall. But in an increasing cost industry, the rise in industry output also causes costs to rise, shifting up the LRATC curve. In the final, long-run market equilibrium (point C in both panels), price at P2 is higher than originally, and the typical firm once again earns zero economic profit. The increase in demand raises both output and price, as shown [in panel (a)] by the upward-sloping long-run supply curve. An Increasing Cost Industry 39 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Dollars Output per period (a) Market Dollars Output per period (b) Firm P1 d1=MR1 LRATC1 q1 A P1 S1 D1 D2 PSR S2 SLR P2 d2=MR2 B P2 LRATC2 C Q2 C Q1 A
  40. 40. What Happens When Things Change? • Decreasing cost industry –An industry in which the long-run supply curve slopes downward • Each firm’s LRATC curve shifts downward as industry output increases • In a decreasing cost industry –A rise in industry output shifts down each firm’s LRATC curve, so that zero economic profit occurs at a lower price –Long-run supply curve slopes downward 40 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  41. 41. Figure Point A in both panels shows the initial long-run market equilibrium, with the typical firm earning zero economic profit. After demand increases, the market reaches a new short-run equilibrium at point B in panel (a). At the higher price, the typical firm earns economic profit (not shown). In the long run, profit attracts entry, supply increases, and price begins to fall. But in a decreasing cost industry, the rise in industry output causes costs to fall, shifting down the LRATC curve. In the final, long-run market equilibrium (point C in both panels), price at P2 is lower than originally, and the typical firm once again earns zero economic profit. The increase in demand raises output but lowers price, as shown [in panel (a)] by the downward-sloping long-run supply curve. A Decreasing Cost Industry 41 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Dollars Output per period (a) Market Dollars Output per period (b) Firm P1 d1=MR1 LRATC1 q1 A P1 S1 D1 D2 PSR S2 SLR P2 d2=MR2 B P2 LRATC2 C Q2 C Q1 A
  42. 42. What Happens When Things Change? • As demand increases or decreases in a market –Prices change: act as signals for firms to enter or exit an industry • When demand increases –Price tends to initially overshoot its long- run equilibrium value • Sizable temporary profits for existing firms • Pulls new firms into the market • Increase industry output 42 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  43. 43. What Happens When Things Change? • When demand decreases –Price falls below its long-run equilibrium value • Sizable losses for existing firms • Drive existing firms out of the market • Decrease industry output • Market signals –Price changes that cause changes in production to match changes in consumer demand 43 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  44. 44. Figure In the upper panel, an increased desire for bottled water shifts the market demand curve rightward, from D1 to D2. Price and quantity rise in the short run, and we move from A to B along short-run supply curve S1. The lower panel shows the corresponding short-run movement from A to B along the economy’s PPF: Greater production of bottled water, less production of other things. In the long run, the higher price creates economic profit, attracting new firms, and shifting the supply curve rightward (upper panel). Price falls and quantity rises further. In the figure, we assume bottled water is an increasing cost industry, so entry brings the price down to P3, at point C, which is higher than the original price. In the lower panel, the further long-run increase in bottled water production moves us along the PPF, from B to C. How a Change in Demand Reallocates Resources 44 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Price Per Bottle Quantity of Bottled WaterQuantity Of Other Goods Quantity of Bottled Water S1 S2 D1 D2 P1 Q1 A B C Q2 Q3 P2 Q1 Q2 Q3 Production possibilities frontier A B C
  45. 45. What Happens When Things Change? • Technological advance –Rightward shift of the market supply curve –Decreasing market price –In the short run • Early adopters may enjoy economic profit –In the long run • All adopters will earn zero economic profit –Firms that refuse to use the new technology will not survive 45 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  46. 46. Figure Technological change may reduce LRATC. In panel (b), the first solar panel firms to adopt new, cost- saving technologies earn economic profit in the short run, because they can initially sell at the old market price of $9.50 per installed watt. That profit leads its competitors to adopt the same technology and attracts new entrants. As market supply increases, price falls until it reaches $7 per installed watt, and each firm is once again earning zero economic profit. Technological Change in Perfect Competition 46 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Price per Installed Watt Watts Installed per Month (a) Market Dollars per Installed Watt Watts Installed per Month (b) Firm $9.50 d1=MR1 LRATC1 q1 $9.50 D Q1 Q2 7 d2=MR2 7 LRATC2 S1 A S2 B
  47. 47. Real Estate Agents and the Zero-Profit Result • Markets in which entry and exit do not affect the market price –The zero-profit result still holds: with a twist –In these markets, instead of prices, costs adjust to eliminate economic profit and loss 47 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  48. 48. Real Estate Agents and the Zero-Profit Result • Real estate agent (seller) –Commission = 3% of the price • Horizontal MR curve –Costs • Office space, transportation, a computer • Agent’s time: showing homes to finicky buyers, negotiating with buyers’ agents • MC curve slopes upward 48 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  49. 49. Real Estate Agents and the Zero-Profit Result • Profit-maximizing agent –Increase the number of homes sold until MC = MR –Earns zero economic profit • Long-run equilibrium 49 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  50. 50. Real Estate Agents and the Zero-Profit Result • An increase in the price of homes –Higher dollar commission –Economic profit in the short run –Long-run: more real-estate agents • Higher MC cost curve • Zero economic profit 50 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  51. 51. Figure Commission per Sale Number of Homes Sold per Year (b) After Commissions Rise, Long-Run Profit Returns to Zero 51 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 $6,000 d1=MR1 ATC1 $12,000 d2=MR2 MC1 15 B 10 A ATC2 MC2 5 C Commission per Sale Number of Homes Sold per Year (a) $6,000 d1=MR1 ATC1 $12,000 d2=MR2 MC1 15 B 10 A
  52. 52. Figure Membership in National Association of Realtors 52 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16

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