EC4101 Week 10 Lecture 02 - Competitive Market PDF

EC4101 Wk.10 Lec.02 Competitive Market Long Run Long Run Supply Curve: A firm’s LMC curve is flatter in the long run as it can adjust all its inputs. Therefore, the long run supply curve starts at a higher shut down price. If price is less than the...

EC4101 Wk.10 Lec.02 Competitive Market Long Run Long Run Supply Curve: A firm’s LMC curve is flatter in the long run as it can adjust all its inputs. Therefore, the long run supply curve starts at a higher shut down price. If price is less than the minimum LAC, or TC>TR, the firm exits the market. P3 is the entry/exit price. The entry/exit process only ends when P = minimum LAC. If a firm is making supernormal profits, then another may be inclined to enter the market. Normal Profits: Accounting profits which just cover the opportunity cost of an owner’s money and time. They occur when economic profit = 0, and at point C on the graph. The long run supply of a competitive firm is the part of its LMC curve above its exit price (min. LAC). Marginal Firm: The last firm to enter in the market, which makes zero long-run profits. No one will enter after them as they will not make any profits. Break Even Price (of a price taking firm): The market price at which it earns 0 economic profit. In perfectly competitive markets: Each firm has the same marginal costs of production In the long run, each firm produces at the minimum long-run average cost (productive efficiency).  In the long run, each firm makes 0 economic profits because of entry and exit. They stay in the market making 0 economic profits as the revenue compensates the owners for their time and money (implicit costs). Allocative efficiency occurs, it implies that all gains from exchange are realised. Uses of the Perfect Competition Model: It is a reasonable approximation of some world markets. It can be used as a benchmark to evaluate and measure deviations from perfection in the real world. The liberalisation/privatisation of many markets has been underpinned by the ideal of perfectly competitive markets. References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Image 1: Economics (12th Ed.) David Begg.