Perfect Competition
Long-run
Unit 7 - Lesson 2
Learning outcomes:
Graph and explain Perfect Competition in
the long-run when there are changes in
Demand and Supply.
Explain that Perfectly Competitive firms are
Allocatively & Productively efficient in the
long-run.
Evaluating Perfect Competition.
Long-run: Perfect Competition
Review:
Period of time when all inputs are variable.
There are no fixed inputs.
This means there will be no AVC since the vertical
distance between ATC & AVC is equal to AFC.
In the long-run, Perfectly Competitive firms
earn Normal or Zero Economic Profit
Short-run to Long-run
Point 1 in Graph b represent
the price in the market.
Point 1 gives the firm (graph
a) supernormal profit.
Due to the free entry/exit into
the marketplace, other firms
will enter the industry.
Increase in number of firms Determinant of Supply Supply increases (S1 - S2) Price decreases (Point 2)
Due to free entry/exit of the Market,
firms will market the market because
other firms are making Economic
Profit. More firms - increases Supply
thus decreasing Price. In the long-run
firms will only make Zero-Economic
Profit.
Economic loss - Short to Long-run
Point 1 represents the price in
the market.
Point 1 the firm makes
Economic Loss (a - b)
Due to free entry/exit into the
market, firms will leave.
Decrease in number of firms Determinant of Supply Supply decreases (S1 - S2) Price increases (Point 2)
Due to free entry/exit of the Market,
firms will leave the market because
they are making Economic Loss.
Less firms - decreases Supply thus
increasing Price. In the long-run
firms will only make Zero-Economic
Profit.
Using your new knowledge
Using graphs explain how a change in Demand
would affect firms? Going from short-run to
long-run.
Short-run
Demand
Long-run
Economic Profit
Normal Profit
Economic Loss
Normal Profit
Allocative Efficiency
Producing the combination of goods & services that
consumers mostly prefer.
In Perfect Competition, allocative efficiency occurs:
P = MC
Perfectly competitive firm are
ALWAYS Allocatively Efficient in the long-run.
P = MC in both the short & long run.
Productive Efficiency - (Technical)
When firms produce at the lowest possible cost.
Using the least amount of resources necessary.
P = Minimum ATC
Short-run: only when firm makes zero-economic
profit
Long-run: Firms will ALWAYS be Productively
Efficient
Allocative & Productive Efficiency
Summary:
Short-run:
Firms are always allocatively efficient - P = MC
Firms are productively efficient only when they
make zero-economic profit.
Long-run:
Firms are always allocatively & productively
efficient.
Evaluating Perfect Competition
Positives:
1. Allocatively Efficient
2. Productively Efficient in the long-run - no
waste.
3. Low prices for consumers
4. Inefficient producers do not produce.
5. Market responds to consumers tastes changes in Demand.
Perfect Competition - Limitations
1. Unrealistic assumptions
2. Limited opportunity to take advantage of
Economies of Scale.
3. Lack of product variety.
4. Limited ability to engage in Research &
Development.
5. Unrealistically assumes there are no additional
costs associated with opening and closing firms.
