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The Rise and Fall of

The Rise and Fall of. Industries. Examples of rising and falling industries. Beef chicken bagel stores smoothies video rental stores drive-in movies. Long Run vs. Short Run in an Industry. Long run for an industry Firms have either entered or exited the industry

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The Rise and Fall of

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  1. The Rise and Fall of Industries

  2. Examples of rising and falling industries • Beef • chicken • bagel stores • smoothies • video rental stores • drive-in movies

  3. Long Run vs. Short Run in an Industry • Long run for an industry • Firms have either entered or exited the industry • Short run for an industry • Firms have neither entered nor exited the industry • Contrast: long run vs. short run for a firm • Long run: can adjust all inputs • Short run: can adjust some but not all inputs

  4. The Long Run Competitive Equilibrium Model • It’s Dynamic! • It has three key ingredients • Two we have seen before • The third is new

  5. (1) Each firm has the typical MC, ATC, AVC graph

  6. (2) Each firm is competitive, and the Market demand curve is downward sloping

  7. (3) Free entry and exit • Firms can enter the industry or exit the industry • firms exit the industry if profits are negative (losses) • firms enter the industry if profits are positive • Note that the definition of profits is economic profits • Opportunity costs are part of total costs

  8. The Typical Firm and the Market

  9. What happens if there is an increase in demand? • First, look at short run effects • Then, look at what happens over time as firms enter or exit • Finally, check out the new long run equilibrium

  10. Now let’s do it by hand to see how the curves change over time

  11. Using the Model to explain the real world. Consider an example:

  12. Now consider a decrease in demand • Short run effects • dynamics over time • new long run equilibrium

  13. Another nice feature of competitive markets Since profits are zero in long run equilibrium, P = ATC Thus, in long run industry equilibrium ATC is at a minimum In other words, cost per unit is a low as you can go

  14. What if there is a shift in costs?Shift down both the ATC and the MC curvesWatch what happens

  15. External Economies of Scale • When a whole industry expands, the firms’ costs may shift down even though the scale at each firm does not expand • Contrast with (internal) economies of scale at a single firm

  16. To illustrate external economies of scale shift both the demand curve and the cost curves. Let’s look at a hand sketch again:

  17. Look more carefully at market supply and demand

  18. Can also have external diseconomies of scale

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