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Understanding Perfect Competition in the Long Run
Dive into the world of perfect competition in the long run. Explore market dynamics, firm behavior, and economic efficiency. Learn how prices equal average total cost and why profits trend to zero over time.

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Now Playing:Perfect competition in the long run – Example 0a
Intros
  1. Perfect Competition in the Long Run Overview:
  2. Perfect Competition in the Long Run Overview:
    Long Run: Entry & Exit
    • Short-run equilibrium  \, →  \, economic loss, profit, or breaks-even
    • Long-run equilibrium  \, →  \, firm always breaks-even
    • Firm incentive to enter market when p > ATC
    • Firm exits market when p < ATC
  3. Perfect Competition in the Long Run Overview:
    Long-Run: Changes to Demand
    • Firm starts by making zero profit
    • Increase in Demand  \, →  \, Economic profit
    • Firms enter market  \, →  \, increase in supply until firms break-even
    • Decrease in Demand  \, →  \, Economic Loss
    • Firms exit market  \, →  \, decrease in supply until firms break-even
Examples
  1. Predicting Prices for Exiting & Entering the Market
    Suppose the market is perfectly competitive, and you are given the following graph:

    Output

    Total Cost

    0

    5

    1

    12

    2

    17

    3

    24

    4

    33

    5

    44

    1. If the equilibrium price is $9, will firms leave or enter the market?

    2. If the equilibrium price is $5, will firms leave or enter the market?

Perfect competition in the long run
Jump to:NotesConceptFAQsPrerequisites
Notes
Long Run: Entry & Exit

Recall in the short-run, firms can either have economic loss, economic profit, or break-even.


In the long run, firms will always end up breaking even.


Entry: Firms will only enter the market if firms in the market are making economic profit (p > ATC).


Long run: entry & exit

When firms enter the market, they increase the supply, shifting the supply curve rightward. This causes the equilibrium price to decrease, which also causes the MR curve (p)  \, to shift down.


Long run: entry & exit increase supply

The supply curve keeps shifting rightward until p = ATC  \, In this case, the firms break even.


Long run: entry & exit firms break even

Exit: Firms will only exit the market if they are incurring economic loss (p < ATC).


Long run: entry & exit

When firms exit the market, the decrease the supply, shifting the supply curve leftward. This causes the equilibrium price to increase, which also causes the MR  \, curve (p) \, to shift up.


Long run: entry & exit

The supply curve keeps shifting leftward until p = ATC \,. In this case, the firms again break even.


Long run: entry & exit

Long Run: Changes to Demand

Increase in Demand: Suppose the firm’s profit is breaking even.


Long run changes to demand


The increase in demand shifts the demand curve rightward, causing an increase to equilibrium price. This causes the MR \, curve (p) \, to shift up.


Long run changes to demand


Firms will see that p > ATC, so there is an economic profit. This causes firms to enter the market, which will shift the supply curve rightward and decrease equilibrium price. Thus, the MR curve (p) \, shifts back down.


Long run changes to demand


The MR  \,curve shifts down until p > ATC. Hence, the firms will break-even.



Decrease in Demand: Suppose the firm’s profit is breaking even.


Long run changes to demand


The decrease in demand shifts the demand curve leftward, causing a decrease to equilibrium price. This causes the MR \, curve (p) \, to shift down.


Long run changes to demand


Firms will see that p < ATC, so they will incur economic loss. This causes firms to exit the market, which shifts the supply curve leftward and increase equilibrium price. Thus, the MR \, curve (p) \, shifts back up.


Long run changes to demand


The MR \, curve shifts up until p = ATC. Hence, the firms will break-even.



Long Run: Changes to Supply as Technology Advance

Decrease in Cost: Suppose the firm’s profit is breaking even.


Long run changes to demand


Technology advances will shift the ATC \, curve and MC \, curve downward, causing firms to have economic profit.


Long run changes to demand


This causes firms to enter the market, which will shift the supply curve rightward and decrease equilibrium price. This causes the MR curve (p) \, to shift down.


Long run changes to demand


The MR curve will shift down until p = ATC. In this case, the firms will break-even.


Long run changes to demand
Concept

Introduction to Perfect Competition in the Long Run

Welcome to our exploration of perfect competition in the long run! This fascinating economic concept is crucial for understanding market dynamics over extended periods. As your friendly math tutor, I'm excited to guide you through this topic. The introduction video we'll watch shortly is a fantastic starting point, offering clear explanations and visual aids to help you grasp the key principles. In perfect competition long run scenarios, firms have ample time to adjust all aspects of their production, including entering or exiting the market. This leads to some intriguing outcomes, such as economic profits trending towards zero and firms producing at the most efficient scale. The long run perfect competition model helps economists analyze market behavior, predict industry trends, and understand resource allocation. As we delve deeper, you'll see how this concept connects to real-world markets and why it's so important in economic theory. Let's get started on this enlightening journey!

FAQs

Here are some frequently asked questions about perfect competition in the long run:

1. What happens to perfect competition in the long run?

In the long run, perfectly competitive markets tend towards equilibrium where economic profits are zero. Firms produce at the most efficient scale, and the price equals both the marginal cost and the minimum point of the long-run average total cost curve. If there are short-term profits, new firms enter the market, increasing supply and driving prices down. If there are losses, some firms exit, decreasing supply and allowing prices to rise.

2. What does a perfect competition earn in the long run?

In the long run, firms in perfect competition earn zero economic profit. This doesn't mean they're not making money; rather, they're earning just enough to cover all their costs, including the opportunity cost of their resources. This state is also known as normal profit.

3. What is true about perfect competition in the long run?

In the long run, perfect competition is characterized by free entry and exit of firms, production at the most efficient scale, price equal to marginal cost and minimum average total cost, and zero economic profits. The long-run supply curve tends to be horizontal, indicating that the industry can expand or contract to meet demand without affecting the price.

4. What is the long-run equilibrium condition for perfect competition?

The long-run equilibrium condition for perfect competition is P = MC = min ATC, where P is price, MC is marginal cost, and ATC is average total cost. This condition ensures that firms are producing efficiently and earning zero economic profit.

5. Why is the long-run supply curve horizontal in perfect competition?

The long-run supply curve in perfect competition is typically horizontal because, in the long run, the industry can expand or contract to meet any level of demand without affecting the price. This is due to the free entry and exit of firms and the assumption of constant costs as the industry expands. However, in some cases, the long-run supply curve may slope upward if there are increasing costs in the industry.

Prerequisites

Understanding perfect competition in the long run requires a solid foundation in several key economic concepts. While there are no specific prerequisite topics provided for this subject, it's crucial to recognize that economics is a field built on interconnected ideas. A strong grasp of fundamental economic principles is essential for comprehending the complexities of perfect competition in the long run.

To fully appreciate the dynamics of perfect competition in the long run, students should be familiar with basic microeconomic concepts such as supply and demand, market structures, and firm behavior. These foundational elements provide the necessary context for exploring how firms operate in a perfectly competitive environment over an extended period.

Additionally, an understanding of short-run market behavior is vital for contrasting and comparing with long-run outcomes. Concepts like marginal cost, average cost, and profit maximization play crucial roles in analyzing firm decisions and market equilibrium in both the short and long run.

The concept of economic efficiency is also closely tied to perfect competition in the long run. Students should be comfortable with ideas such as allocative efficiency and productive efficiency to fully grasp the implications of perfect competition on resource allocation and societal welfare.

Furthermore, knowledge of market entry and exit barriers is essential for comprehending how firms behave in a perfectly competitive market over time. This understanding helps explain the process of market adjustment and the tendency towards zero economic profit in the long run.

While specific prerequisite topics are not listed, it's important to note that a solid foundation in these general economic principles will significantly enhance a student's ability to analyze and interpret perfect competition in the long run. Each of these concepts contributes to a more comprehensive understanding of how markets function and evolve over time.

As students delve into the study of perfect competition in the long run, they'll find that their prior knowledge of these economic fundamentals serves as a valuable toolkit. This background allows for a deeper exploration of how firms adapt to market conditions, how industry-wide changes occur, and why perfect competition leads to specific long-term outcomes.

In conclusion, while there may not be a definitive list of prerequisites, a well-rounded understanding of basic economic principles is indispensable. This foundation enables students to navigate the complexities of perfect competition in the long run with greater ease and insight, fostering a more comprehensive grasp of this important economic concept.