1. Pure Competition in the Long Run
Sam, Greg, Rohit, Matt, Dylan

2. In the long run...
Pure competition describes an market where no firms are large enough to have the market power to set the price of a homogeneous product
Firms can expand/contract, enter/exit
The firm is the price taker
Identical costs: all firms in the industry have the same costs
Example: Agricultural products

3. Short Run vs. Long Run
short run: a firm can either earn profits or incur losses
long run: when firms are earning profits, new firms will be attracted to enter the industry
When firms suffer losses, they may be forced to shut down and leave the industry
Entry/exit occurs until the industry has reached a long run equillibrium. Firms then generate normal profits

4. Entry into the Market An increase in demand raises price and profit.
This encourages other firms to enter into the market.

5. Entry continued
When firms enter the market, demand increases and supply increases.
Supply increases, prices fall

6. Exit from the Market
Higher industry output from new entrants drives price and profit back down.
Normal profit
P=MR=MC=ATC
Encourages exit from the market

7. Exit continued
When firms exit the market, Supply decreases, demand decreases
Supply decreases, prices fall

8. Equilibrium
Entry or exit will continue until the market price generates normal profits for the industry
With firms earning normal profit, they will have no incentive to enter or exit the industry, which then constitutes an equilibrium in the industry
Entry and exit improves resource allocation: Firms that exit the industry leave their resources to be used in other industries who will use the resources more efficiently

9. Allocative Efficiency
Definition: occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences
A market will be allocatively efficient if it is producing the right goods for the right people at the right price.
A more precise definition of allocative efficiency is at an output level where the price equals the Marginal Cost (MC) of production
This is because the price that consumer’s are willing to pay is equivalent to the marginal utility that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost.
Essentially, allocative efficiency will occur when marginal benefit = marginal cost

10. The primary force encouraging the entry of new firms into a purely competitive industry is:
Normal profits earned by firms already in the industry
Economic profits earned by firms already in the industry
Government subsidies for start up firms
A desire to provide goods for the betterment of society
2. Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm:
Minimizes losses by producing at the minimum point of its AVC curve
Maximizes profits by producing where MR=ATC
Should close down immediately
Should continue producing in the short run but leave the industry in the long run if the situation persists
3. Which of the following is true concerning purely competitive industries
There will be economic losses in the long run because of cut throat competition
Economic profits will persist in the long run if consumer demand is strong and stable
In the short run, firms may incurs economic losses or earn economic profits but in the long run, they earn normal profit
There are economic profits in the long run but not in the short run
4. Long run competitive equilibrium:
Is realized only in constant cost industries
Will never change once it is realized
Is not economically efficient
Results in zero economic profits
5. A constant cost industry is one in which:
Resource prices fall as output is increased
Resource prices rise as output is increased
Resource prices remain unchanged as output is increased
Small and large levels of output entail the same total cost