McConnellMicro13_Ch09.ppt

PART 3 MICROECONOMICS OF PRODUCT MARKETS Prepared by Dr. Amy Peng Ryerson University © 2013 McGraw-Hill Ryerson Ltd. Explain how the long run differs from the short run in perfect competition. Explain how the entry and exit of firms affects long-run equilibrium through resource flows and long-run profits and losses. Explain the differences between constant-cost, increasing-cost, and decreasing-cost industries. Discuss perfect competition and efficiency. Discuss creative destruction and the profit incentives for technological innovation © 2013 McGraw-Hill Ryerson Ltd. Chapter 9 * Profit maximization in the long run Easy entry and exit The only long run adjustment we consider Identical costs All firms in the industry have identical costs Constant-cost industry Entry and exit do not affect resource prices © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO1 * Entry eliminates profits Firms enter Supply increases Price falls Exit eliminates losses Firms exit Supply decreases Price rises © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO2 * ATC MR MC $60 50 40 D1 S1 D2 $60 50 40 S2 © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO2 * ATC MR MC $60 50 40 D3 S3 D1 $60 50 40 S1 © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO2 * Constant cost industry Entry/exit does not affect LR ATC Constant resource price Special case Increasing cost industry Most industries LR ATC increases with expansion Specialized resources Decreasing cost industry Personal computer industry Increasing cost if output contracts © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO3 * 90,000 100,000 110,000 Q3 Q1 Q2 $50 S Z1 Z2 Z3 D3 D1 D2 © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO3 * 90,000 100,000 110,000 Q3 Q1 Q2 $50 P1 S Y1 Y2 Y3 D3 D1 D2 $40 $55 P2 P3 © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO3 * 90,000 100,000 110,000 Q3 Q1 Q2 $50 P1 S X1 X2 X3 D3 D1 D2 $40 $55 P3 P2 © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO3 * In the long run, efficiency is achieved Productive efficiency Producing where P = min. ATC Allocative efficiency Producing where P = MC © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO4 * P MR D S Qe Qf ATC MC P=MC=Minimum ATC (Normal Profit) P Consumer Surplus Producer Surplus © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO4 * Perfectly competitive markets will automatically adjust to: Changes in consumer tastes Resource supplies Technology Recall the “Invisible Hand” © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO4 * Entrepreneurs would like to increase profits beyond just a normal profit Decrease costs by innovating New product development © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO5 * Competition and innovation may lead to “creative destruction” Creation of new products and methods destroys the old products and methods © 2013 McGraw-Hill Ryerson Ltd. Chapter 9, LO5 * Patent protected prescription drugs earn substantial economic profits for the pharmaceutical company. Generic drugs become available as the patent expires on the existing drug. Results in a 30-40% reduction price Greater consumer surplus and efficiency © 2013 McGraw-Hill Ryerson Ltd. Chapter 9 * Q1 Q2 P1 S D P2 a b c d f © 2013 McGraw-Hill Ryerson Ltd. Chapter 9 * 9.1 The long run versus the short run in perfect competition 9.2 Long-run equilibrium 9.3 Long-run supply for constant-cost, increasing-cost, and decreasing-cost industries 9.4 Perfect competition and efficiency 9.5 Technological advance and competition © 2013 McGraw-Hill Ryerson Ltd. Chapter 9 *