perfectcompetitionppt.pptVIP

* * * * * * * * * * * * * Short-Run Market Supply and Demand The market (industry) supply curve is the horizontal sum of all the firms’ marginal cost curves While the firm’s demand curve is perfectly elastic, the industry’s demand curve is downward sloping The market supply curve takes into account any changes in input prices that might occur 14-* ATC Profits Short-Run Market Supply and Demand Graph P Q Market Supply P Market Demand P Q P P = D = MR MC ATC Qprofit max Market Firm 14-* Long-Run Competitive Equilibrium Profits create incentives for new firms to enter, market supply will increase, and the price will fall until zero profits are made At long run equilibrium, economic profits are zero The existence of losses will cause firms to leave the industry, market supply will decrease, and the price will increase until losses are zero 14-* Long-Run Competitive Equilibrium Normal profit is the amount the owners would have received in their next best alternative Zero profit does not mean that the entrepreneur does not get anything for his efforts Economic profits are profits above normal profits 14-* Long-Run Competitive Equilibrium Graph P Q P = D = MR MC SRATC LRATC At long-run equilibrium, economic profits are zero 14-* SR Profits Market Response to an Increase in Demand Graph P Q S0(SR) P0 D0 P Q P0 MC ATC Q0,2 Market Firm S1(SR) D1 P1 1 P1 1 1 Q1 2 2 2 Q0 Q1 Q2 1 1 2 2 S(LR) 14-* Long-Run Market Supply If the long-run industry supply curve is upward sloping, the market is an increasing-cost industry If the long-run industry supply curve is perfectly elastic, the market is a constant-cost industry If the long-run industry supply curve is downward sloping, the market is a decreasing-cost industry In the short run, the price does more of the adjusting, and in the long run, more of the adjustment is done by quantity 14-* Application: Kmart After 2 years of losses, Kmart realized that the decrease in demand was permanent Although Kmart was making losses, Kmart deci