Pure Competition in the long run

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Pure Competition in the long run
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PROFIT MAXIMIZATION IN THE LONG RUN
Goal of the Analysis
MRMCPrice Minimum ATC
Long-Run Equilibrium The Zero Economic Profit
Model
Assumptions...

• Entry and Exit Only
• Identical Costs
• Constant-Cost Industry

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PROFIT MAXIMIZATION IN THE LONG RUN
Temporary profits and the reestablishment of
long-run equilibrium
S1
MC
ATC
MR
D1
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PROFIT MAXIMIZATION IN THE LONG RUN
An increase in demand increases profits
Economic Profits
S1
MC
ATC
MR
D2
D1
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PROFIT MAXIMIZATION IN THE LONG RUN
New competitors increase supply, and lower prices
decrease economic profits.
Zero Economic Profits
S1
S2
MC
ATC
MR
D2
D1
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PROFIT MAXIMIZATION IN THE LONG RUN
Decreases in demand, losses, and the
reestablishment of long-run equilibrium
S1
MC
ATC
MR
D1
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PROFIT MAXIMIZATION IN THE LONG RUN
A decrease in demand creates losses
Economic Losses
S1
MC
ATC
MR
D1
D2
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LONG-RUN EQUILIBRIUM FOR A COMPETITIVE FIRM
MC
Price
ATC
MRDARP
Pe
Price MC MR Minimum ATC (normal profit)
Qe
Quantity