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III. Purely competitive adjustment
A. Suppose industry demand and supply yield an equilibrium price
P at which a firm's economic profit is zero.
1. Step 1
indicates an increase in demand to D' causing economic profit.
2. Market
entry is relatively easy and this profit draws in new firms
increasing supply to S', Step 2, and
economic profit disappears.
3. This
automatic purely competitive adjustment causes equilibrium long run economic
profit for pure
competition to
be zero.
4.To many, zero long run economic profit
represents an ideal economic model as all the company
earns is a normal return
on investment.
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Has
the Purely Competitive Adjustment
Causing a New Normal for wages?
Beginning with the economic expansion
caused by WWII, demand for U.S. manu-
factured goods increased dramatically.
It took Germany, England and Japan
many years to repair war damaged
manufacturers and bring an end to U.S.
manufacturers monopoly power. As
a
result, demand to increase from D to D.'
Profits maximization resulted.
Thanks in
part to Unions, these manufactures shared
their excess profits with unionized workers
and wages
increases spilled over to many
workers.
Serious competition from foreign manufact-
urers, beginning
with automobiles and steel,
increased supply
from S to S'. Rust belt
industries lost all their excess profits and
some incurred a loss as supply increased to S"
(not shown). Wage give backs began
and
many other workers found themselves with
stagnating wages.
Companies used technology
and outsourcing to be more competitive and
this continues to put pressure on wages.
This also happened in the finance industry with
competition coming
from foreign banking and
cheap Internet trading. Their attempt to
increase D for their services with exotic products
like derivatives has not worked out
well as
of
07/01/10.
As a result, the high standard enjoyed in the
U.S. will grow very
slowly as we share the
wealth with people from around the world.
We may
even have to give a little back
because of energy dependence and recent
decadence. But we will still enjoy the
highest standard of living in the
industrialized
world. Technology will continue to make our
lives better
but the best things in life will
continue to be free.
Manufacturing is
experiencing a revival,
but the jobs it is generating pay less than they used to.
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IV. Economic analysis of pure competition
A. Competition is
eff icient.
1.
Price settles where long-run ATC is at its lowest point indicating goods are
produced efficiently.
2.
P = MR = MC indicating that resources are allocated efficiently as the
$'s spent by consumers (P) = the
$'s received by producers (MR) = the
$ cost of producers (MC) and
economic profit is zero.
B. Shortcomings
1.
Spillover costs (pollution) and benefits (education) aren't properly measured
resulting in goods being
over and
under produced.
a. Government intervention was needed to lower automobile pollution.
b. Governments supports education with grants and inexpensive loan problems
to students and colleges.
2.
Monopoly power develops to negate Adam Smith's "invisible hand" of
competition which is required
to assure that the purely
competitive adjustment occurs.
3.
Eliminating economic profit makes it difficult for competitive firms to afford
expensive R & D
and technology.
C.
Economics Interactive has an in depth narrative of pure competition.
V. Competitive supply
1. A firm's MC curve is its
short-run supply curve.
2. Industry supply is the
horizontal summation of the firm's supply curves.
3.
Economics: Long
Run Supply - Cliffs Notes
analyzes the affect of long term supply on the efficiency of all industries.
VI. For a conservative view of competition
Read
Pure and Perfect" Competition?
By What Standard? Part 5 in a
Series of articles on Capitalism,
Free-competition,
Antitrust, and Microsoft, By Richard M. Salsman
VII. Other theories of the competitive model from Wikipedia.
A.
Bertrand competition
B.
Cournot competition
requires calculus.
VIII.
Our
Economics Learning Center
has information for students, teachers, an professionals.
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