III. INDUSTRY (sum of many perfectly competitive firms)

Perfect competition and cost industry

I. P erfect competition

· Number of sellers is large, individual seller cannot influence the market (price)

· Homogeneous (nearly identical) product

· Free entry and exit

· Perfect information about prices

II. Main results

P=MC(q)

In LR equilibrium: π LR=0

π SR can be different from zero

Perfect competition firm has CRS in LR equilibrium (produce at point where ACLR is constant=minimal)

III. INDUSTRY (sum of many perfectly competitive firms)

Industry demand is horizontal sum of individual Marshalian demands curves of all individuals

Industry supply ^SR is horizontal sum of MC^SR curves of all firms in the industry (:

IV. Type I problem: Initially Demand increases (shifts to the right)

Firm	CCI	Industry

SR: Assume initially we begin from the points where a typical competitive firm breaks even π ^LR=π ^SR=0. (point A)

Initial shock: D↑ => Q↑ P↑ => сдвиг вдоль Industry supply^SR (Σ SRMC^-1). As firms are price takers they begin to produce at point B: π ^SR> 0; q₂> q₁

LR: 0) На графике фирмы нарисовать первоначальные долгосрочные издержки (AC^LR; MC^LR): пересечение AC^LR и MC^LR находится в том же месте, что и пересечение AC^SR и MC^SR; AC^LR –является нижней огибающей AC^SR; MC^LR более эластичная (flatter), чем MC^SR, так как капитал становится переменным фактором производства в LR. На графике индустрии нарисовать Σ LRMC^-1 более пологой, чем Industry supply^SR (Σ SRMC^-1) и пересекающей её в точке А.

1) Other firms see that it is possible to gain profits on that market=> other NEW firms ENTER the market Σ LRMC^-1↑ => Σ LRMC^-1 moves to the right until P_new=P_initial (AC^LR min)

2) Выбрать cost industry:

· Constant cost industry (CCI): In the case of constant costs industry, an increase in the industry output (Q) does not affect factors' prices (AC^LR; MC^LR; Σ LRMC^-1stay the same=> point C)

· Increasing cost industry (ICI): In the case of increasing costs industry, an increase in Q leads to an increase in factors' prices (AC^LR; MC^LR shift up a bit=> Σ LRMC^-1 moves to the left until P = new AC^LR min=> point C)

· Decreasing cost industry (DCI): In the case of decreasing costs industry, an increase in Q leads to a decrease in factors' prices (AC^LR; MC^LR shift down a bit=> Σ LRMC^-1 moves to the right until P = new AC^LR min=> point C)

ICI, DCI => Сказать, что произойдет с индивидуальным выпуском фирмы (minimum efficient scale) точно нельзя, так как MC может сдвигаться меньше/=/больше, чем AC (q₃-?) Соединить и точки А и С на графике Industry и получить Industry supply^LR

CCI	ICI	DCI
Horizontal Industry supplyLR	Increasing Industry supplyLR	Decreasing Industry supplyLR
Firm	DCI	Industry
Firm	ICI	Industry

Вывод: P depends on the industry; Q must increase

V. Type II problem: Initially cost of capital (r) increases (SR: AC↑; LR: AC↑ and MC↑)

Firm	CCI	Industry