8/9b - ARE BUSINESSES EFFICIENT?
Pure Competition in the Long Run
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8b
•PURE COMPETITION in the Long Run:
•long run equilibrium
•pure competition and efficiency
•marginal cost pricing
8/9b: Pure Comp.- Long Run Equil.
Must Know / Outcomes:
• Distinguish between the short run and the long run in pure competition.
• Explain the long run equilibrium position for a competitive firm using entry
and exit of firms to explain adjustments from nonequilibrium positions.
• Describe the role of profits and losses in achieving the long run equilibrium
• Explain the shape of long run industry supply curves in constant cost and
increasing cost industries.
• Differentiate between productive and allocative efficiency.
• Explain why allocative efficiency and productive efficiency are achieved
where P = minimum ATC = MC.
• Understand the adjustment process from the short run to the long run and
the role of barriers to entry (why do competitive firms earn zero economic
profits in the long run?)
• Draw the long run equilibrium graph for a purely competitive firm and
indicate the profit maximizing quantity, the allocatively efficient quantity,
and the productively effeicient quantity.
• Explain why allocative efficiency and productive efficiency are consistent
with maximizing consumer and producer surplus and an efficient use of
resources.
• Evaluate the impact of creative destruction on purely competitive
industries
8/9b: Pure Comp.- Long Run Equil.
KEY TERMS:
long-run equilibrium, long run supply curve,
constant-cost industry, increasing-cost industry,
decreasing-cost industry, productive efficiency,
allocative efficiency, consumer surplus,
producer surplus, invisible hand of capitalism,
creative destruction, marginal cost pricing,
dynamic efficiency
1.Which graph shows a perfectly
competitive firm in long run equilibrium?
1.
2.
3.
4.
A
B
C
D
1.Which graph shows a perfectly
competitive firm in long run equilibrium?
1.
2.
3.
4.
A
B
C
D
2. Which characteristic of perfectly competitive
firms best explains why they earn normal profits
in the long run?
1. Very many firms
2. Produce standardized product
3. No non-price competition
4. No barriers to entry
2. Which characteristic of perfectly competitive
firms best explains why they earn normal profits
in the long run?
1. Very many firms
2. Produce standardized product
3. No non-price competition
4. No barriers to entry
3. What will
happen in the
long run?
1.
2.
3.
4.
Demand will increase
Demand will decrease
Supply will increase
Supply will decrease
3. What will
happen in the
long run?
1.
2.
3.
4.
Demand will increase
Demand will decrease
Supply will increase
Supply will decrease
Entry
Eliminates
Profits
What happen if firms
initially are in long
run equilibrium and
then demand
increases?
1.
2.
D increases
which raises the
price creating
profits
2. Profits attract
new producers
which will
increase supply
and decrease the
price and back to
zero profits
Remember: there are no barriers to entry and exit
Exit
Eliminates
Losses
What happen if firms
initially are in long
run equilibrium and
then demand
decreases?
1.
2.
D decreases
which lowers the
price creating
losses
2. Losses cause
producers to
leave which will
decrease supply
and increase the
price and back to
zero profits
Remember: there are no barriers to entry and exit
In the long
run in a
perfectly
competitive
market
we will
always get
Remember: there are no barriers to entry and exit
ZERO
(normal)
profits
4. This
graph
shows:
1.
2.
3.
4.
Short run equilibrium
Long run equilibrium
Both LR and SR equil.
Neither LR or SR equil.
4. This
graph
shows:
1.
2.
3.
4.
Short run equilibrium
Long run equilibrium
Both LR and SR equil.
Neither LR or SR equil.
What is:
•Productive efficiency?
•Allocative efficiency?
5. Productive efficiency:
1.
2.
3.
4.
MR = MC
MC = ATC
P = MC
MSB = MSC
5. Productive efficiency:
1.
2.
3.
4.
MR = MC
MC = ATC
P = MC
MSB = MSC
At the equilibrium (profit maximizing) quantity
purely competitive firms achieve productive efficiency:
•They produce the quantity where ATC is at a mimimum
•They produce the quantity where MC = ATC
6. Which is NOT allocative
efficiency?
1.
2.
3.
4.
Maximum consumer plus producer surplus
P = MC
MSB = MSC
Minimum ATC
6. Which is NOT allocative
efficiency?
1.
2.
3.
4.
Maximum consumer plus producer surplus
P = MC
MSB = MSC
Minimum ATC
7. Perfectly competitive firms are
most concerned with achieving:
1.
2.
3.
4.
Allocative efficiency (P = MC)
Productive efficiency (MC = ATC)
Maximum profit (MR = MC)
Maximum Consumer surplus
7. Perfectly competitive firms are
most concerned with achieving:
1.
2.
3.
4.
Allocative efficiency (P = MC)
Productive efficiency (MC = ATC)
Maximum profit (MR = MC)
Maximum Consumer surplus
8. “PS” stands for:
1.
2.
3.
4.
Product Supplied
Producer Surplus
Productive Surplus
Perfect Shortrun
8. “PS” stands for:
1.
2.
3.
4.
Product Supplied
Producer Surplus
Productive Surplus
Perfect Shortrun
At the equilibrium (profit maximizing) quantity
purely competitive firms achieve allocative efficiency:
•They produce the quantity where P = MC (MSB = MSC)
•They maximize consumer plus producer surplus
•They produce the quantity where MSB = MSC
9. “Socially optimal quantity” means:
1.
2.
3.
4.
Allocative efficiency
Productive efficiency
Profit maximizing
Consumer surplus
9. “Socially optimal quantity” means:
1.
2.
3.
4.
Allocative efficiency
Productive efficiency
Profit maximizing
Consumer surplus
10. If Py = $25 and the MCy = $18:
1. Y is being produced with the fewest resources
possible
2. Society will gain if less of y is produced
3. Resources are being underallocated to Y
4. Too much Y is being produced
10. If Py = $25 and the MCy = $18:
1. Y is being produced with the fewest resources
possible
2. Society will gain if less of y is produced
3. Resources are being underallocated to Y
4. Too much Y is being produced
Pure Comp. – Long Run Equilibrium
At the profit maximizing level of output of Q (MR = MC):
•
•
Allocative efficiency is achieved: P = MC
Productive efficiency is achieved: minimum ATC (MC=ATC)