46.Output, Price, and Profit in the Long Run
Economic profit motivates firms to enter the industry, thereby increasing the market supply.
When the market supply curve shifts rightward, the market price falls. Eventually the price falls to equal the minimum ATC for each firm in the industry and firms have adjusted their plant size so they are producing at the minimum long-run average cost. At this price, firms in the industry no longer earn an economic profit and so firms no longer enter the industry. The figure illustrates this long-run equilibrium. In the figure, LRAC is the long-run average cost curve and SRAC is the short-run average cost curve.
One difference between the old and new market equilibriums is that the number of firms in the industry has risen and total quantity produced in the industry has increased.
The effects of a decrease in market demand are the opposite of those outlined above.
In the long run, competitive firms earn zero economic profit (price = average total cost).
47.Competition and Efficiency
Efficient Use of Resources
Resource allocation in a market is efficient when society values no other use of the resources more highly. Resource use is efficient when production is such that the marginal social benefit of the good equals the marginal social cost of the good.
Choices, Equilibrium, and Efficiency
Consumers allocate their budgets to get the most value out of them. Because consumers get the most value out of their budget, a consumer’s individual demand curve for a good is the consumer’s marginal benefit curve for the good. If no one else benefits from the good other than the consumers, then as shown in the figure the market demand curve for a good is the marginal social benefit curve.
Firms maximize their profits in order to get the most value out of their resources. Firms make choices across all possible allocations of their resources. A firm’s supply curve for a good is its marginal cost curve. If all the costs of production of the good are paid by the producers, then as shown in the figure the market supply curve for a good is the marginal social cost curve.
In a competitive equilibrium, the quantity demanded equals the quantity supplied. If there are no externalities, the demand curve is the same as the marginal social benefit curve and the supply curve is the same as the marginal social cost curve, so at the competitive equilibrium, the marginal social benefit equals the marginal social cost. Resource use is efficient. Because resources are used efficiently, at the competitive equilibrium there is no other allocation of resources that will generate greater net benefits to society. The figure shows this outcome, where resource use is efficient at the equilibrium quantity of 3,000 units.
