1. 1 Competitive Markets in the Long Run New firms can enter the market Existing firms can exit the market Profit and loss in the long run –Economic profit - outsiders enter the market –Economic losses - firms exit the market

2. 2 From SR Profit to LR Equilibrium –Economic profit attracts new entrants –Market supply curve - shift rightward –Market price - falls –Demand curve facing each firm - shifts downward –Each firm - decrease output Positive economic profit - attracts new entrants until economic profit = 0

3. 3 Long-Run Equilibrium S1S1 d1d1 ATC MC $4.50 With initial supply curve S 1, market price is $4.50… $4.50 900,0009,000 so each firm earns an economic profit. A A Price per Bushel Market Bushels per Year Dollars Firm Bushels per Year D Figure 8 From Short-Run Profit to Long-Run Equilibrium

4. 4 Long-Run Equilibrium S1S1 d1d1 ATC MC $4.50 Profit attracts entry, shifting the supply curve rightward… $4.50 900,0009,0005,000 until market price falls to $2.50 and each firm earns zero economic profit. S2S2 d2d2 A A 2.50 E E MarketFirm Price per Bushel Bushels per Year Dollars Bushels per Year D 1,200,000 Figure 8 From Short-Run Profit to Long-Run Equilibrium

5. 5 From SR Loss to LR Equilibrium –Economic losses - firms exit the market –Market supply curve - shift leftward –Market price - rises –Demand curve facing each firm - shifts upward Economic loses – firms exit until economic loss = 0 In the LR, firms earn “normal profit” - zero economic profit

6. 6 Perfect Competition and Plant Size In LR equilibrium, every firm will select –Plant size –Output level And –Operate at minimum point of LRATC curve

7. 7 Perfect Competition and Plant Size P1P1 q1q1 d 1 = MR 1 LRATC MC 1 ATC 1 E d 2 = MR 2 LRATC MC 2 ATC 2 P* q* 4.and all firms earn zero economic profit and produce at minimum LRATC. Dollars Output per Period 3.As all firms increase plant size and output, market price falls to its lowest possible level... 1.With its current plant and ATC curve the firm earns zero economic profit. 2.The firm could earn positive profit with a larger plant, producing here Figure 9 Perfect Competition and Plant Size

8. 8 A Summary of the Competitive Firm in the LR In long-run equilibrium, the competitive firm produces Q where: MC=minimum ATC=minimum LRATC=P Consumers are getting the best deal they could possibly get

9. 9 An Increase in Demand Short-run –Rise in market price –Rise in market quantity –Economic profits Long-run –Market equilibrium changes The long-run supply curve –Relationship between market price and market quantity - after all long-run adjustments have taken place

10. 10 Constant Cost Industry Entry has no effect on input prices Industry output has no effect on individual firms’ cost curves Horizontal long-run supply curve The industry –supplies any amount of output demanded –at an unchanged price

11. 11 LRATC Constant-Cost Industry D1D1 S1S1 A P1P1 Q1Q1 P1P1 q1q1 MC A ATC d 1 = MR 1 Output per Period Market Dollars Firm Output per Period Price per Unit Figure 10 A Constant-Cost Industry INITIAL EQUILIBRIUM

12. 12 Constant Cost Industry MC ATC Dollars Firm P1P1 q1q1 A d 1 = MR 1 Output per Period Market S1S1 Output per Period Price per Unit D 1 A P1P1 Q1Q1 d SR = MR SR P SR B B C Q SR Q2Q2 q SR S2S2 S LR D2D2 Figure 10 A Constant Cost Industry NEW EQUILIBRIUM LRATC

13. 13 Increasing Cost Industry Entry causes input prices to rise Each firm’s LRATC curve shifts upward as industry output increases Zero economic profit occurs at a higher price The long-run supply curve slopes upward

14. 14 Increasing Cost Industry LRATC 1 Dollars Firm P1P1 q1q1 A d 1 = MR 1 Output per Period Market S1S1 Output per Period Price per Unit D1D1 A P1P1 Q1Q1 d 2 = MR 2 P2P2 P SR P2P2 LRATC 2 C B C Q2Q2 S2S2 S LR D2D2 Figure 11 An Increasing Cost Industry

15. 15 Decreasing Cost Industry Entry by new firms decreases input prices Each firm’s LRATC curve shifts downward as industry output increases Zero economic profit occurs at a lower price The long-run supply curve slopes downward

16. 16 Decreasing Cost Industry LRATC 1 Dollars Firm P1P1 q1q1 A d 1 = MR 1 Output per Period Market S1S1 Output per Period Price per Unit D1D1 A P1P1 Q1Q1 d 2 = MR 2 P2P2 P SR P2P2 LRATC 2 C B C Q2Q2 S2S2 S LR D2D2 Figure 12 A Decreasing Cost Industry

17. 17 Market Signals and the Economy Market signals –Price changes - cause changes in production to match changes in consumer demand Demand increases - price rises –signals firms to enter the market –industry output increases Demand decreases –price falls –signals firms to exit the market –industry output decreases

18. 18 A Change in Technology A technological advance –rightward shift of the market supply curve –market price decreases –Short run - economic profit –Long run - zero economic profit Firms that refuse to use the new technology will not survive.

19. 19 A Change in Technology $3 Q1Q1 S1S1 2 Q2Q2 A B D S2S2 1000 LRATC 1 LRATC 2 d 1 = MR 1 d 2 = MR $3 2 Bushels per Day Price per Bushel Market Dollars per Bushel Firm Bushels per Day Figure 13 Technological Change in Perfect Competition

20. 20 Solar Power: Increasing Cost Industry Generating electricity from solar panels –costs more than twice as much as generating the same energy from fossil fuels With government help –by 2006, Germany became the world’s largest producer of solar energy The growth slowed dramatically in early 2006 –even though the subsidies and incentives remained The solar panel industry - increasing cost industry

21. 21 Solar Power Firm 3.50 q1q1 d 1 = MR 1 LRATC 2003 A Market D 2003 Quantity of Solar Panels (Megawatts) Price (Dollars per peak watt) 3.50 750 A $5.00 C 1,750 S 2005 Figure 14 The Global Market For Solar Panels Price (Dollars per peak watt) Quantity of Solar Panels (Megawatts) S 2003 B D 2005 d 2 = MR 2 $5.00 LRATC 2005 C

22. 22 Solar Power D 2003 Quantity of Polysilicon (Millions of Kilograms per Year) Price per kilogram 32 27 E Figure 15 The Global Market For Polysilicon S 2003 $70F D 2005