HI folks,  we actually do have one more
thing to do in Chapter 12.  We'll call
this twelve, part three.  We haven't
discussed the long run, essentially if
firms are making profits should they try to
get bigger.... and when they're all profit
maximizing and trying to choose the
optimal scale in the long run what does
that look like??? Most folks are going to
tell you the perfect competition is in
fact the ideal for efficiency.  You're
going to get productively efficient
outcomes  and allocatively efficient outcomes.  So I'll show you real
quickly why everyone thinks that's going
to be the case.  In order to attack this
problem we're going to have to revisit
economies of scale.  If you'll recall
sometimes a firm getting bigger would
actually improve its long-run average
costs ,so throughout this green region
here as you get larger your average
costs are improving...  and in this flat
spot you actually have constant returns
to scale and constant returns to scale
means you get bigger but your costs
aren't getting any better.... and then over
here you're going to have decreasing
returns to scale and decreasing returns
to scale clearly implies that getting
bigger makes your average costs worse.
So if you're in a position where you're
making profits and getting bigger can
actually lower your cost structure why
would you not do that??? That's what we're
going to talk about.  Okay, so let's go
ahead and take a look at a situation
where you have a price that is plenty
large enough to generate profits and you
can see that if you draw in a short run
average total cost and a marginal cost
to go with it... (and let's say that this is
one possibility here on your lrac)... you
can see that your Q star as suggested by
the intersection between price and
marginal cost is going to generate
profit.  You're going to have a revenue
box that is larger than your total cost
box.  The difference between the two of
them
is going to be your profits.  Well if
you're making profits but you can make
this same quantity in a more
cost-effective way by increasing your
scale... right?... down here this point
suggests that there is a way to produce
that quantity at a lower average total
cost.....You're going to want to do that. 
You're going to want to buy the extra
machines, the factory space, whatever it
may be and you'd lower your overall
average total costs.  This would expand
your profit box of course.  Now expansion
can increase profits if it lowers ATC,
because what we're talking about really
here is you would switch from ATC zero
here and all the sudden now you would be
at an ATC that's much lower,  right?  In
fact you may even choose to go further
than this... you may choose to expand clear
out to here, right?  The whole point is that there's
options to expand and keep lowering your
costs at high prices that's really
attractive.
Okay
in our last slide we started to
recognize that any firm that was making
profits at the going market price would
start to recognize that if there were
economies of scale that they could take
advantage of they were going to want to
expand and the ATC was going to start
dropping.  As that firm expands you're
going to see more supply in the market
and I want you to remember also that the
perfectly competitive firm.... there are no
barriers to entry that protect them.  Anyone
can join this market that wants to, so
you should totally expect imitators... and
when people start to imitate and join
your market you are going to end up with
more supply.... and more supply of course
means that we should expect lower prices. 
So price starts falling and that's okay
this firm is still making money.... they're
still profiting and in fact they're
still actually saying this looks pretty
good to me.  I think that I'm going to
expand some more,  because if I expand
some more I'm actually going to be able
to jump out and I'm going to be able to
get my ATC to go even lower.... So they may
choose to expand so more, and other firms
may look around and say these guys are
still making profits.   I think I'm going
to actually join that market as well. And
so as you have people that continue to
join this market you're going to see
that the supply keeps getting pushed out
and the price keeps falling.... and as the
price continues to fall you may end up
with a situation where you're in
breakeven.... doesn't matter.... even if you're
breaking even you still want to get
bigger if by getting bigger you can
lower your cost structure.  This firm and
every other firm is going to continue to
keep entering and entering in at larger
scales until there is no way to improve
on the average total cost structure,  the
LRAC 
Finally once you have enough of these
folks who have entered in you are going
to see that the supply curve has jumped
out and the price is driven down to the
absolute lowest that it can possibly go.
I shouldn't say possibly,  it's the lowest
price that can be acceptable to firms in
the long run,  because of course at this
lowest price here,  what we have is
situation where the firm is breaking
even.  You would have in essence a revenue
box that was equal to your total cost
box.  Zero profits means that no other
firm is going to want to join anymore. this does not look like an attractive market
to enter, and at this point we've got a
couple of nice things going for us.  We
have driven our price down to its
absolute lowest possible spot.
We have also at the same time driven our
quantity out as far as it can possibly
go.  So this situation is really
attractive to the economists, because
once profits equal zero (at this point)
you've got a couple of things happening.
Your price is actually P star because it
is the minimum price that keeps these
firms around.  It's also the lowest
possible cost for producing this product,
because you reach the minimum of your
LRAC.
Therefore, it is productively efficient. 
It is also the minimum of your ATC,  so you
know they're breaking even;
hence, the profit equaling zero... and it's
still equal to MC so it's allocatively
efficient.  The last unit generated a
benefit (as expressed by the price) that
was equal to the marginal costs that
were required to create it.  So it's
allocatively efficient,  productively
efficient,  and firms have essentially
exhausted all of their possible options...
right?  There at the best scale they can get to. 
This is long-run equilibrium.
