The Rise and Fall of

1
The Rise and Fall of
Industries
2
Examples of rising and falling industries

• Beef
• chicken
• bagel stores
• smoothies
• video rental stores
• drive-in movies

3
Long Run vs. Short Run in an Industry

• Long run for an industry
• Firms have either entered or exited the industry
• Short run for an industry
• Firms have neither entered nor exited the
  industry
• Contrast long run vs. short run for a firm
• Long run can adjust all inputs
• Short run can adjust some but not all inputs

4
The Long Run Competitive Equilibrium Model

• Its Dynamic!
• It has three key ingredients
• Two we have seen before
• The third is new

5
(1) Each firm has the typical MC, ATC, AVC graph
6
(2) Each firm is competitive, and the Market
demand curve is downward sloping
7
(3) Free entry and exit

• Firms can enter the industry or exit the industry
• firms exit the industry if profits are negative
  (losses)
• firms enter the industry if profits are positive
• Note that the definition of profits is economic
  profits
• Opportunity costs are part of total costs

8
The Typical Firm and the Market
9
What happens if there is an increase in demand?

• First, look at short run effects
• Then, look at what happens over time as firms
  enter or exit
• Finally, check out the new long run equilibrium

10
(No Transcript)
11
Now lets do it by hand to see how the curves
change over time
12
Using the Model to explain the real world.
Consider an example
13
(No Transcript)
14
Now consider a decrease in demand

• Short run effects
• dynamics over time
• new long run equilibrium

15

16
Another nice feature of competitive markets

• Since profits are zero in long run equilibrium, P
  ATC
• Thus, in long run industry equilibrium ATC is at
  a minimum
• In other words, cost per unit is a low as you can
  go

17
What if there is a shift in costs?Shift down
both the ATC and the MC curvesWatch what happens
18
External Economies of Scale

• When a whole industry expands, the firms costs
  may shift down even though the scale at each firm
  does not expand
• Contrast with (internal) economies of scale at a
  single firm

19
To illustrate external economies of scale shift
both the demand curve and the cost curves. Lets
look at a hand sketch again
20
Look more carefully at market supply and demand
21
Can also have external diseconomies of scale
22
(No Transcript)