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Elasticity of Market Supply:Long-Run Competitive Equilibrium

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Microeconomics ­ECO402
VU
·  The long-run response to short-run profits is to increase output and profits.
·  Profits will attract other producers.
·  More producers increase industry supply which lowers the market price.
Long-Run Competitive Equilibrium
·Profit attracts firms
·Supply increases until profit = 0
$ per
Firm
Industry
$ per
unit of
S
unit of
output
output
LMC
P
$40
S
LAC
$3
P
0
2
D
Q2
Q
Output
q2
Output
Long-Run Competitive Equilibrium
1) MC = MR
2) P = LAC
·  No incentive to leave or enter
·  Profit = 0
3) Equilibrium Market Price
Questions
1) Explain the market adjustment when P < LAC and firms have identical costs.
2) Explain the market adjustment when firms have different costs.
3) What is the opportunity cost of land?
Economic Rent
­ Economic rent is the difference between what firms are willing to pay for an input less
the minimum amount necessary to obtain it.
An Example
­ Two firms A & B
­ Both own their land
­ A is located on a river which lowers A's shipping cost by $10,000 compared to B
­
124
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Microeconomics ­ECO402
VU
­ The demand for A's river location will increase the price of A's land to $10,000
­ Economic rent = $10,000
·  $10,000 - zero cost for the land
­ Economic rent increases
­ Economic profit of A = 0
Firms Earn Zero Profit in Long-Run Equilibrium
A baseball team
Ticket
in a moderate-sized
Price
city sells enough
tickets so that price
is equal to marginal
LMC
LAC
and average cost
(profit = 0).
$7
Season Tickets
Sales (millions)
1.0
Ticket
Price
LMC
LAC
Economic Rent
$10
A team with the same
$7
cost in a larger city
sells tickets for $10.
Season Tickets
Sales
1.3
(millions)
With a fixed input such as a unique location, the difference between the cost of production
(LAC = 7) and price ($10) is the value or opportunity cost of the input (location) and
represents the economic rent from the input.
If the opportunity cost of the input (rent) is not taken into consideration it may appear that
economic profits exist in the long-run.
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Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor