Slide 1
ECO100
INTRODUCTION TO ECONOMICS
Lecture 8:
LONG-RUNG COMPETITIVE
EQUILIBRIUM
Slide 2
COMPETITIVE INDUSTRY
ADJUSTMENT IN THE LONG-RUN
 Change in the number of firms
 Changes in the scale of
production
Slide 3
EFFECT OF AN INCREASE IN THE
NUMBER OF FIRMS
P
INDUSTRY
S
P
FIRM
S’
MC
P0
P0
P1
P1
ATC
AVC
Pm
D
Q0
Q1
Q
Pm
q1
q0
q
Slide 4
FIRST CONDITION FOR LONG-RUN
COMPETITIVE EQUILIBRIUM
 All firms in the industry
make zero economic profit
Slide 5
EFFECT OF A CHANGE
IN PLANT SIZE
P
INDUSTRY
P
FIRM
S1
SRAC1
S2
S3
SRMC1
P1
P1
P2
P3
P2
P3
Q1 Q2 Q3
Q
SRMC2
LRAC
SRAC2
q1
q2
q3
q
Slide 6
THREE CONDITIONS FOR LONG-RUN
COMPETITIVE EQUILIBRIUM
 Firms produce where MC = P
 All firms in the industry
make zero economic profit
 LRAC is at a minimum
Slide 7
SHORT-RUN EFFECT OF AN
INCREASE IN DEMAND
P
P
INDUSTRY
FIRM
S
LRAC
SRMC
P2
P2
SRAC
D’
P1
P1
D
Q1
Q2
Q
q1
q2
q
Slide 8
THE LONG-RUN INDUSTRY
SUPPLY CURVE
3 CASES:
 Constant cost industry
 Increasing cost industry
 Decreasing cost industry
Slide 9
LONG-RUN SUPPLY CURVE:
CONSTANT COST INDUSTRY (1)
 The cost schedule of the firm does not
change as the industry expands
 This means that the prices of inputs
remain unchanged as the size of the
industry increases
 Therefore, the minimum of the LRAC
does not change
Slide 10
LONG-RUN SUPPLY CURVE:
CONSTANT COST INDUSTRY (2)
P
P
INDUSTRY
FIRM
S
S’
LRAC
SRMC
P2
P2
SRAC
P1
P1
LRS
D’
D
Q1
Q2
Q3
Q
q1
q2
q
Slide 11
CONSTANT COST INDUSTRY (3)
Old Equilibrium New Equilibrium
Price
P1
P1
Firm’s Output
q1
q1
Industry’s Output
Q1 = n1q1
Q3 = n2q1 > Q1
Number of firms
n1
n2 > n 1
Slide 12
LONG-RUN SUPPLY CURVE:
INCREASING COST INDUSTRY (1)
 The cost schedule of the firm increases
when the industry expands
 This means that the prices of inputs
increase as the size of the industry
increases
 Therefore, the minimum of the LRAC
increases
Slide 13
LONG-RUN SUPPLY CURVE:
INCREASING COST INDUSTRY (2)
P
P
INDUSTRY
FIRM
S
LRAC’
S’
P2
P3
P1
LRS
Q2
LRAC
D’
D
Q1
P3
P1
Q3
Q
q1
q
Slide 14
LONG-RUN SUPPLY CURVE:
INCREASING COST INDUSTRY (3)
P
P
INDUSTRY
FIRM
S
S’
LRAC’
P2
P3
P1
LRS
Q2
LRAC
D’
D
Q1
P3
P1
Q3
Q
q1
q3
q
Slide 15
INCREASING COST INDUSTRY (4)
Case 1
Case 2
Case 3
Price
P3 > P1
P3 > P1
P3 > P1
Firm’s Output
q3 = q1
q3 < q1
q3 > q1
Industry’s Output Q3 = n2q3 > Q1 Q3 = n2q3 > Q1 Q3 = n2q3 > Q1
Number of firms
n2 > n1
n2 > n1
1) n2 = n1
2) n2 < n1
3) n2 > n1
Slide 16
LONG-RUN SUPPLY CURVE:
DECREASING COST INDUSTRY (1)
 The cost schedule of the firm
decreases when the industry expands
 This means that the prices of inputs
decrease as the size of the industry
increases
 Therefore, the minimum of the LRAC
decreases
Slide 17
LONG-RUN SUPPLY CURVE:
DECREASING COST INDUSTRY (2)
P
P
INDUSTRY
FIRM
S
S’
P2
LRAC
S’
P1
P3
LRAC’
P1
LRS P3
D
Q1
Q2
D’
Q3 Q
q1
q
Slide 18
DECREASING COST INDUSTRY (3)
Case 1
Case 2
Case 3
Price
P3 < P1
P3 < P1
P3 < P1
Firm’s Output
q3 = q 1
q3 < q 1
q3 > q 1
Industry’s Output
Q3 = n2q3 > Q1
Q3 = n2q3 > Q1
Q3 = n2q3 > Q1
n2 > n 1
1) n2 = n1
2) n2 < n1
3) n2 > n1
Number of firms
n2 > n 1
Slide 19
EFFECT OF
TECHNOLOGICAL
CHANGE
P
Industry
$
Old Plant
MC1
$
AC1
SRS1
P1
P1’
MC2
LRS
AVC1
P1
P1‘
P1
P1’
LRS’
P2
New Plant
AC2
P2
D
Q1
Q2
Q
q1
q
q