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PRINCIPLES OF MICROECONOMICS (ECO 202)
Northern Virginia Community College
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Perfect Competition in the Long-Run
In the Long-Run Firms will enter if there is profit Firms will leave if there is loss So, ALL firms break even, they make NO economic profit (No Economic Profit=Normal Profit) In long run equilibrium a perfectly competitive firm is EXTREMELY efficient.
Firms Entering: INDUSTRY: Firms enter to earn profit so supply increases in the industry Price decreases and quantity increases
FIRM: Price falls for the firm because they are price takers. Price decreases and quantity decreases
Short-run economic profits are eliminated (back to breaking even)
Firms Exiting: INDUSTRY: Firms leave to avoid losses so supply decreases in the industry Price increases and quantity decreases
FIRM: Price increase for the firm because they are price takers. Price increases and quantity increases
Short-run economic losses are eliminated (back to breaking even)
Firm in Long-Run Equilibrium: Price = MC = Minimum ATC (Firm making a normal profit) There is no incentive for firms to enter or leave the market
Changes in Demand: Demand Increase: Short-Run - The price increases and quantity increases Profit is made in the short-run
Long-Run – Firms enter the market, supply increases, price falls No profit is made in the long-run
Demand decreases: Short-Run - The price decreases and quantity decreases Profit is lost in the short-run
Long-Run - Firms leave the market, supply decreases, price rises No profit is made in the long-run
Constant-Cost Industry - New firms entering the market do not increase the costs for the firms already in the market. MC and ATC do not change.
Increasing-Cost Industry - New firms entering the industry increase costs for existing firms because they bid up the price of inputs. MC and ATC go up. Firms leaving reduce costs for remaining firms because their exit reduces the cost of inputs. MC and ATC go down.
Efficiency: Perfect Competition forces producers to use limited resources to their fullest. Inefficient firms have higher costs and are the first to leave the industry. Perfectly competitive industries are extremely efficient
Productive efficiency - The production of a good in a least costly way (minimum amount of resources are being used). Price = Minimum ATC
Allocative efficiency - Producers are allocating resources to make the products most wanted by society. Price = MC
Long-Run Efficiency:
Perfect+Competition+in+the+Long-Run+Notes
Course: PRINCIPLES OF MICROECONOMICS (ECO 202)
University: Northern Virginia Community College
