AP Economics
Mr. Bernstein
Module 60:
Long-Run Outcomes in Perfect Competition
November 2015
AP Economics
Mr. Bernstein
The Industry Supply Curve
• In Perfect Competition, there are many small firms
producing identical products
• Each has an identical Short-Run cost curve, which
is the MC curve above the shutdown point (AVC)
• As P rises, output rises along the MC curve
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AP Economics
Mr. Bernstein
The Industry Supply Curve
• The sum of each
firm’s output on their
Short-Run supply curve
is the Industry
Short-Run Supply Curve
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AP Economics
Mr. Bernstein
Long-Run Equilibrium
• In Perfect Competition,
firms earn a normal
profit
• But profits and losses
occur in the short run…
• …those profits and
losses do not last,
through a process of adjustment
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AP Economics
Mr. Bernstein
The Long-Run Process of Adjustment
• When profits exist in the short run
• The market sees entry of new firms
• More producers in the market shift the short-run
market supply curve to the right
• The price begins to fall in the market
• As the price falls, each firm produces less along their
MC curve
• Profits for each firm fall
• When the price reaches the break-even point at the
minimum of ATC, entry stops
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AP Economics
Mr. Bernstein
The Long-Run Process of Adjustment
• When losses exist in the short run
• Firms exit
• Fewer producers in the market shift the short-run
market supply curve to the left
• The price begins to rise in the market
• As the price rises, each firm produces more along their
MC curve
• Losses for each firm fall
• When the price reaches the break-even point at the
minimum of ATC, exit stops
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AP Economics
Mr. Bernstein
The Long-Run Process of Adjustment
At P = $8, P > ATC, profit, firms enter, Supply shifts right, P falls, firm Q falls
…(notice we are presenting the market graph and firm graph side-by-side)
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AP Economics
Mr. Bernstein
Long-Run Industry Supply Curves
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AP Economics
Mr. Bernstein
Long-Run Industry Supply Curves
• Constant Cost Industry – Supply curve is horizontal
• Increasing Cost Industry – more realistic – costs rise
as competitors enter (bidding for resources, increase
in advertising, etc.)
• Decreasing Cost Industry – Supply Curve is
downward sloping – it is possible for input costs to
decrease as an industry grows (ie electric cars)
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AP Economics
Mr. Bernstein
Efficiency in Long-Run Equilibrium in Perfect
Competition
• Productive Efficiency: ATC is at minimum
• Allocative Efficiency: P = MC
• All firms earn normal profit in long run
• Revenues cover costs AND next best alternative
• So no existing firms exit and no new firms wish to enter
• No Deadweight Loss, all mutually beneficial transactions
are made
• We will compare this to outcomes in other market
structures
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