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Unit 9: Market Structure – Perfect Competition
Notes
Figure 9.10
Market Response to a Technological Improvement
Figure 9.11
A technological improvement will shift AC and MC curves down, creating short run profits. As
existing firms expand output and as new firms enter, these profits will be competed away until
the price has once again fallen to equal average total costs (initially point B in the short run) and
ultimately point C in the long run (Figure 9.11).
Market with Specialised Inputs Response to a Decrease in Demand
Faced with a decrease in demand which it sees as fall in price and hence profit, a competitive
firm will respond by decreasing output in order to minimise losses. Firm output and market
output will fall. Figure 9.12 is the market response: as all firms decrease output, the demand for
specialised inputs will fall, causing the firm's cost in (a) to fall from AC to AC . The long run
0 1
equilibrium price will be lower than the original price, and the long run supply curve S will be
LR
upward sloping, rather than perfectly elastic.
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