- [Instructor] Let's
dig a little bit deeper
into what happens in
perfectly competitive markets
in the long run.
So what we have on the left-hand side,
and we've seen this
multiple times already,
is our supply and our demand curves
for our perfectly competitive market,
and you can see the equilibrium
price right over here,
marked with this a dotted line,
and as we've talked
about in multiple videos,
the firms in that perfectly
competitive market,
the perfectly competitive firms,
they just have to price takers,
so the market price is going
to be their marginal revenue curve.
It's gonna be this horizontal curve.
And it would be rational for
them to produce the quantity.
So they're not going to set the price,
but they can choose what
quantity to produce,
but it would be rational
for them to keep producing
while the marginal revenue is
higher than the marginal cost
up to including when the marginal revenue
is equal to the marginal cost.
So for this firm at this
current state of affairs,
it would be rational for them
to produce this quantity right over there.
And as we've talked about in other videos,
at that quantity, they're going
to make an economic profit.
And the way that we can see that
is at this quantity, this
is the average total cost,
that is your marginal revenue,
and so you are going to
get this much per unit
and then you multiply,
so the height is how much you get per unit
and then you multiply that
times the number of units,
so the area of this rectangle
is that positive economic
profit that this firm will have.
Now, that's in the short run,
but now let's think about
what will likely happen in the long run.
If folks see other folks making
a positive economic profit,
remember, economic profit
doesn't just account
for regular cost, it also
includes opportunity cost,
so a lot of you will say hey,
I would wanna put my resources
into this market so that I can make
that positive economic profit as well.
But what's gonna happen
as you have entrance into this market?
Well, that's gonna shift the
supply curve to the right.
At any given price, you're
gonna have more supplies,
one way to think about it.
So that's a supply curve.
Let's just call that one.
Now, you're gonna have more entrance.
More entrance.
And what's going to happen?
Well, you might get to
something like you might get
to a situation like this.
Let me see if I can draw it well.
You might get to a situation like this
where you have more entrance
and you got the supply curve two.
Now, what's going to be the quantity
that firm A produces in that one?
Remember, firm A is one of many firms.
Well, in this situation, we
have a new equilibrium price.
So if this was P sub one,
now we have this new
equilibrium price, P sub two,
which is going to define a
new marginal revenue curve
for all of the players in this
perfectly competitive market
and so the new marginal revenue curve
is gonna be right over there.
Now, in this situation, what
is the rational quantity
for firm A to produce?
Well, once again, as
long as marginal revenue
is higher than marginal cost,
it makes sense for them to
produce more and more and more,
up until the point that they are equal.
So now, firm A would want to produce less
because the market price that
it just has to take is less.
But notice what happens
as more and more entrants
got into the market.
The market price, which also defines
this horizontal marginal revenue
curve, went lower and lower
to the point where firm
A now in this situation
is making no economic profit.
At this point, where not
only as marginal revenue
intersecting marginal cost,
but that's exactly the point
in which marginal cost is
equaling average total cost.
So one way to think about it is
in a perfectly competitive firm,
they're productively efficient.
They are producing the quantity
that minimizes their average total cost.
We've already talked about that point
where marginal cost and
average total cost intersect.
That's gonna be the minimum
point for average total cost.
And why is that?
Well, while marginal cost
is below average total cost,
average total cost is gonna
get lower and lower and lower,
and then once marginal cost gets higher
than average total cost,
well, then the average total cost curve
will starting going curving up.
So we just saw a situation
that even where we see economic
profit in the short run,
in the long run, entrants are
going to go into that market
and it's going to reduce the
economic profit down to zero
and at that point, the firm
that has a zero economic profit,
they're productively efficient.
They are producing at the minimum point
of the average total cost curve.
And we've already talked before
that this equilibrium point
right over here in our market,
because our demand and supply curves,
the intersection point defines the price,
our equilibrium price and quantities,
we're also allocatably efficient.
We've talked about things like
dead weight lost in the past.
That is not happening right over here.
Our marginal benefit is
equal to our marginal cost
right at that equilibrium
price and quantity.
Now, some of you might be saying, well,
what about the other situation?
What about if for some
reason we were in a,
let's call the supply curve here.
Let's say people overshot.
Too many people joined into this market.
So let's say we went
to supply curve three,
well what's going to happen?
Let me label this.
This is right over here, this
is marginal revenue curve one,
which is equal to price one.
This is marginal revenue curve two,
which is equal to price two.
And then this would define,
so this right over here
would be price three, price three,
which would define marginal
revenue curve three.
So marginal revenue curve three,
which is equal to price three.
Well if too many entrants
joined into that market,
now firm A has a more difficult scenario.
They are, would produce at this quantity,
we've talked about many times already,
but at that quantity, each
unit their average total cost
is higher than that
revenue they're getting.
So they're going to be
running at an economic loss
in the short run.
But what would happen in the long run?
Well firm A in the long run
would probably exit the market
and other firms who are
running at economic loss
would exit the market,
and so that would shift
the supply curve back to the left.
And so we would eventually
get, once again,
to that reality where firms
have no economic profit
in there and we have a market
that is allocatably efficient,
no dead weight loss,
and firms are producing
at the minimum point of their
average total cost curve,
which is known as productive efficiency
or productively efficient.
