Perfect competition & Industry Supply Flashcards
how does perfect competition impact cost curves in the short run ?
As firms are identical their cost curves are the same
Their inputs don’t get more expensive as firms enter - constant input prices
What happens in the short run to supply?
The number of firms is fixed and each firm produces at profit maximisation as long as P > AVC
It is the horizontal summation of all individual firm supply curves
Give an example of short run Industrial supply in perfect competition
On firm produces at quantity q0 and p*, then 2 identical firms together supply 2q0 at the same price
How does entry and exit work in the long run supply?
In the long run firms can enter and exit freely
As long as they can make profit they will enter
How does economic profit occur in the long run?
it occurs when economic profit = 0
P = AC = MC
What is the long run supply curve?
The long run industry supply curve is perfectly elastic (flat) if input prices are constant and firms are identical
The market price settles at minimum AC, and they adjust based on demand
The more firms that enter the flatter the industry supply curve becomes
How to find the total output of long run market supply?
Number of firms x q*(per firm)
What changes if input costs rise in Long run supply?
As molre firms enter the industry output increases, input prices go up
This is because more firms for the same scarce resources
How does Rising input costs impact long run supply?
each firms cost curves are pushed upwards (MC and AC both rise)
this means that firms need higher prices to stay profitable
How is the long run supply curve impacted by rising input costs?
It now slopes upwards because the price must rise with industry output to cover the rising input costs
What changes in Long-Run supply with Heterogenous Firms?
- firms now differ their cost structures
- some firms will be more efficient have have lower AC/MC
What are the implications on long run supply with Heterogenous firms?
Only firms with low enough costs to earn non-negative profit at market price will stay
Less efficient firms may still operate but only if market price > their AC
More efficient firms earn positive economic profit (lower AC than market price)
