Upload
paula-wilcox
View
213
Download
0
Tags:
Embed Size (px)
Citation preview
Examples of rising and falling industries
• Beef
• chicken
• bagel stores
• smoothies
• video rental stores
• drive-in movies
Long Run vs. Short Run in an Industry
• Long run for an industry– Firms have either entered or exited the industry
• Short run for an industry – Firms have neither entered nor exited the
industry
• Contrast: long run vs. short run for a firm– Long run: can adjust all inputs– Short run: can adjust some but not all inputs
The Long Run Competitive Equilibrium Model
• It’s Dynamic!
• It has three key ingredients– Two we have seen before– The third is new
(1) Each firm has the typical MC, ATC, AVC graph
08_05
DOLLARS
QUANTITY
MC
ATC
AVC
(2) Each firm is competitive, and the Market demand curve is
downward sloping
09_05
PRICE
Demand curve from the perspective of a typical firm
Price is constant because the single seller cannot affect the price.
QUANTITY PRODUCED BY SINGLE FIRM
PRICE
Demand
Demand
Market demand curve
QUANTITY PRODUCED BY ALL FIRMS IN THE MARKET
Market Single Firm
(3) Free entry and exit
• Firms can enter the industry or exit the industry– firms exit the industry if profits are negative
(losses)– firms enter the industry if profits are positive
• Note that the definition of profits is economic profits– Opportunity costs are part of total costs
The Typical Firm and the Market09_06
PRICE PRICE
MC
ATC
P
FIRM QUANTITY
Supply
Demand
MARKET QUANTITY
Typical Firm Market
Market price determined by intersection
Zero profit because P = ATC
Firm produces this amount.
What happens if there is an increase in demand?
• First, look at short run effects
• Then, look at what happens over time as firms enter or exit
• Finally, check out the new long run equilibrium
09_07A
PRICE PRICE
FIRM QUANTITY MARKET QUANTITY
Typical Firm Market
MC
ATC
S
SHORT RUN
D’
P’
D
1. Demand increases, causing the price to rise.
3. These profits bring more firms into the industry...
2. Higher price raises profits from zero to area of shaded rectangle.
P
09_07B
PRICE PRICE
FIRM QUANTITY MARKET QUANTITY
4. increasing supply
and lowering prices.
MarketTypical Firm
MC
ATC
SS’
D
LONG RUN
5. Profits are eventually driven back to zero because P = ATC.
P’
D’
Now let’s do it by hand to see how the curves change over time
Using the Model to explain the real world. Consider an example:
09_03
PRICE(DOLLARS
PER TON)
700
500
300
100
1986 1988 1990
Price of grapes
09_04
NUMBER OF ACRES
4,000
3,000
2,000
1,000
1985 1986 1987 1988 1989 1990 1991
New vineyards
Now consider a decrease in demand
– Short run effects– dynamics over time – new long run equilibrium
09_08A
2. The lower price brings losses to the firms shown in this rectangle.
1. Demand declines, lowering the price.
3. These losses cause firms to leave the industry...
MC
ATC
S
D’
P’
D
PRICE PRICE
FIRM QUANTITY MARKET QUANTITY
Typical Firm Market
SHORT RUN
P
09_08B
5. The lower price eventually brings profits back to zero in the long-run equilibrium.
4. causing supply to decline and the price to rise.
D’ D
S’S
MC
ATC
PRICE PRICE
FIRM QUANTITY MARKET QUANTITY
MarketTypical Firm
LONG RUN
P
•
Another nice feature of competitive markets
• Since profits are zero in long run equilibrium, P = ATC
• Thus, in long run industry equilibrium ATC is at a minimum
• In other words, cost per unit is a low as you can go
What if there is a shift in costs?
Shift down both the ATC and the MC curves
Watch what happens
External Economies of Scale
• When a whole industry expands, the firms’ costs may shift down even though the scale at each firm does not expand
• Contrast with (internal) economies of scale at a single firm
To illustrate external economies of scale shift both the demand
curve and the cost curves. Let’s look at a hand sketch again:
Look more carefully at market supply and demand
09_11
PRICE
S1
S2
S3
D1 D2D3
QUANTITY
Market
Short-run industry supply curves
Long-run industry supply curve
Can also have external diseconomies of scale
09_10
PRICE
S1S2
S3
QUANTITY
Market
D1D2
D3
Long-run industry supply curve
Short-run industry supply curves