 So, now next we will move to the long run equilibrium and how the short run is different from long run because long run is the situation where all the inputs are variable and the output can be increased by changing all the inputs, there is no fixed cost in the long run. So, in the long run the perfect competitive firm only on the normal profit there is no case of loss, there is no case of super narrow profit, all the firms they are normal profit in case of a perfect competitive firm. This is due to unrestricted entry into and exit of firms from the industry in the long run. So, if you remember one of the characteristic what we discuss in the case of characteristic of perfect competitive economy is the free entry and free exit and this is the main source of this is the main point that why the perfect competitive firm just unlike the normal profit. Two extreme possibilities generally it may happens, we can discuss two extreme possibility and then from there we can lead to the fact that why the firm only they on the normal profit in the case of the long run. So, one firms earning super normal profit and second firms incur losses in the short run. In the first case the firm is earning super normal profit in the long run taking this as a situation let us see how generally the firms end in a situation where they just get the normal profit. Assuming that if some of the firm they are just earning the super normal profit in the short run. Now, what is the what will the outcome or what will be the consequence? Normal profit some of the existing firms they are making profit in the super normal profit in the market there is free entry so that will that will be the incentive for the few more firms to go and operate in the market because it is profitable market and some of few of the firms they are getting profit over here. New firms enter into the market there is no restriction on entry. Supply increases because they also go and produce the same product because this is the market where the uniform product or the identical product gets produced. With the entry of new firm supply is of the market increases where assuming there is no change in the demand because when the firms get profit that may not profitable for the buyers. So, if buyers if it is not profitable maybe they are not demanding more in the market. Existing firm on super normal profit which attracts the new firms to enter into the market new firm enter into the market no change in the demand supply increases this lower the market prices because supply is more and demand is less. The process of adjustment continue till the time price equal to the long run average cost that is average revenue is equal to average cost which is again equal to the marginal revenue and marginal cost. So, in this case it is the case of the normal profit where average revenue is equal to the average cost. So, the entry of new firm will continue to come till the time at least all the firms they are not getting the normal profit in the market. So, if you look at the super normal profit of the existing firm are squeezed until all the firms in the industry earn the normal profit. Then we will take the second situation where some of the firm or maybe existing firm some of the existing firms they are getting or they are incurring loss. Now, what would be the outcome since this is long run and they are already incurring loss from the short run onwards. This would force few of the producer or few of the sellers to leave the industry in the long run because they are not they may not able to sustain loss for the long period of time. Their exit from the industry cause a reduction in the supply of the product and as a result equilibrium price in the industry increases. So, now there is a decrease in the supply demand remain constant the there is a increase in the equilibrium price of the industry. The process of adjustment again continue to the point where the marginal firm no longer earn losses or we can say till the time price line is tangent to the average cost. So, the processor adjustment continued to the point where the managerial firm where the marginal firm no longer earn losses and till the price the till the time till the price line tangent to the average cost. And if the price line is tangent to the average cost that is how we get the normal profit. Equilibrium occurs at a point where price is tangent to the long run average cost and all the firms make normal profit in the long run. So, equilibrium occurs at a point where price is tangent to the long run average cost curve and all the firm they just earn the normal profit. So, whether you take the case of super normal profit whether you take the case of the super normal loss this is not going to continue in the long run at least in the perfect competitive market structure which has a significant future as free entry and free exit. And because of that at the end of the day if you will find all perfectly competitive firm they are just getting the normal profit even if they are getting a super normal profit or the incurring loss generally that in a in a time period generally they again come back to a situation where all the firm they are just getting the normal profit. So, the condition from the profit maximizing behavior of the firm from the long run immerse from here that is P is equal to marginal cost is equal to marginal revenue which is equal to the long run average cost curve. So, we will just see the graphical representation that how graphically we can reach to a long run equilibrium. This is P which is also equal to average revenue and marginal revenue here we take the quantity where we take the average revenue marginal revenue and price and this is the long run average cost curve this is the short run average cost curve this is the short run marginal cost curve and this is the equilibrium point and this is the equilibrium level of output. So, what is the profit maximizing condition in case of long run that is long run average cost curve is equal to the short run average cost curve equal to the short run marginal cost curve equal to the marginal marginal revenue and equal to the average revenue. So, the equality of long run average cost curve short run average cost curve short run marginal cost curve marginal revenue and average revenue that leads to the long run equilibrium long run profit maximization. Then we will see the supply curve in case of the long run market supply and long run individual firm supply in case of three different type of industry that is constant cost industry increasing cost industry and decreasing cost industry. So, if you remember the in case of short run the market supply is horizontal summation of the individual firm supply curve and how we get the individual firm supply curve individual firm supply curve is that segment of the marginal cost curve which lies above the average variable cost, but that is that cannot be done in case of the long run because in the long run at least we are not checking the short run condition it is actually exit from the market. So, in the long run we will see that whenever there is a changes in the price whenever there is a changes in the factor of production it is not only due to change in the price also due to the change in the factor of production the increase or decrease in the prices of the factor that also lead to the change in the supply. So, that will analyze through the three different industry that is constant cost industry, increasing cost industry and decreasing cost industry. To start with we will first analyze the constant cost industry. Constant cost industry is an industry in which cost of production remain constant as output in the industry expand means the scale of output is increasing at the constant cost of production there is no increased cost of production. Now, we know that whenever there is a super normal profit new firms enter into the market what will happen to the supply of the product as new firms enter into the industry. Obviously, supply will increase because new firm they have entered into the industry what happens to the price of the product price is decreases because given the demand then supply is more and demand is constant and supply is increased. So, now supply is more than demand and that leads to decrease in the price. So, price goes back to where it was before the demand change, but there is no more output being produced by more firm. So, if so the price goes back where it was before the demand changes, but there is no more output is being produced by more firm because they know that if they are increasing the supply that leads to decrease in the market price and it is no more profitable for the existing firm at least. Note that if price did not drop enough there would be still the positive economic profit and firm would continue to enter the industry. So, if price is not decreasing significantly still there will be some amount of the economic profit and which will again act as an incentive for the firm to enter into the industry. The firm should continue to enter in the industry supply would keep increasing and the price should drop some more because since there is a new firm still entering still supply will increase and price will again decrease more. The second one is if the price drop too much it would not cover cost per unit there would be losses. So, at least they are not getting only the super normal profit also they are not getting the normal profit rather they are incurring loss. Some would leave the industry supply would fall and the price would come back just covering the cost of just price would come back of just covering cost per unit. So, either if it is just dropping a bit again new firm will continue to come because still there is some amount of profit if it is drops too much the existing firm the incur loss and when they are not covering up their cost per unit they prefer to exit the market which will reduce the supply and the price would come back of just covering the cost for unit. So, what has happened as a result of increase in the demand in the constant cost industry? We now have the same price we had before but we now have more output because you have more firms in the industry. So, in a constant cost industry firm will produce as much or agility as the economic demands at a price which is just enough to cover the cost per unit. They will not produce more than that because it is a constant cost industry firm will produce only whatever is the requirement on the basis of the demand at a price which is just enough to cover the cost per unit. It means the long run supply curve in a constant cost industry is horizontal because price is fixed and the supply they increase on the basis of the demand whenever there is a increase in the demand they just cover up that at the typical price. Now, we will see what is the how is the graphical representation of the long run supply curve in case of constant cost industry. So, this is our demand curve this is the demand curve this is S 1 this is S 0. So, this is T 0 this is S 0. So, this is our P 0 and at the same price will continue to supply more. So, that is why this is our long run supply curve and this is the price that is P 1 this is one equilibrium point this is another equilibrium point. So, the long run supply curve is constant because they are not producing more they are just increasing the supply just on the basis of the demand that is comes from the consumer. So, this is the long run supply curve in case of constant cost industry which is just a straight line and it is parallel to the x axis. Then, we will take this case in case of the increasing cost industry and decreasing cost industry. Now, what is the increasing cost industry? Increasing cost industry is when they increase the scale of output the cost of production also increases. So, in case of in case of increasing cost industry factor prices rise as the new firms enter into the market and existing firm expand the capacity because new firms enter into the market they require input they require factors and also the existing firm they enter they expand their capacity they also need the factor and as well since the demand is increasing the factor price also increasing given the supply at that same level. So, if the inputs are specialized factor prices are likely to rise when the increase in the industry wide demand for inputs to products increases. So, demand remain if you look at if demand is the new firms enter into the market existing firm expand the expand the production capacity that leads to increase in the industry wide demand for inputs and if the inputs are specialized again the factor prices are likely to increase. The rise in the factor cost or the increase in the factor cost would force the cost for each firm in the industry and increase the price at which firms earn the zero profit. So, when there is a increase in the factor cost that also lead to increase in the cost of the each firm because now they are spending more on the incurring the incurring the expansion of the factors and the inputs and increase the price because if input cost is more obviously, the market price has to be more because that is if the price is not covering the input cost the the firm will prefer to leave the market if they are not getting the profit. Since it is a long run at least they should get the normal profit. So, increase in the factor price would force the cost of the firms to increasing and also the increase in the price because at least they feel that the unit cost should at least earn which the firms earn zero profit. Therefore, in case of increasing cost industry the long run supply curve is upward sloping because increase in the new firms entered into the market existing firm expand the size. Demand for input increases and sometimes there is also demand for specialized input that leads to increase in the cost of production for the firms that leads to increase in the market price and that is the reason in case of in case of increasing cost industry we get a upward sloping supply curve and that will check graphically that how we get a upward sloping curve in case of increasing cost industry. So, this is increasing cost industry we are finding out the long run supply curve. So, we have d 0 we have d 1 then we have s 0 and then we have s 1. So, this is e 0 this is e 1 and corresponding to this we have p 0 we have p 1 and if you join this 2 point e 0 to e 1 we get a long run supply curve. So, it is upward sloping sloping in case of increasing cost industry and why it is upward sloping because the factor price increases which leads to the increase in the increase in the cost of production for the firm and also which leads to the increase in the market price and that force the in fact the firms to charge a higher price because they have to at least cover up the unit cost what they are incurring to produce the product. Now, we will check the decreasing cost industry. So, in case of decreasing cost industry if input price declines when the industry output expand individual firms marginal cost curve shift down and the long run supply curve is downward sloping. So, since in case of decreasing cost industry when the scale of operation increases it increases with a decreasing cost of production. So, that has to given a reason that if because of the decrease in the input price. So, if input price declines when the industry output expands individual firms marginal cost curve shift down because the per unit cost decreases and the long run supply curve is downward sloping. So, it is a case of decreasing cost industry where the scale of operation increases cost of production decreases because of less input price which leads to decrease in the marginal cost marginal cost shift downs and that lead to decrease in the long run supply curve in case of a perfectly competitive market structure typically in case of decreasing cost industry. So, input price may decline to the zero profit condition when output increases and when new entrants make it more cost effective for other firms to provide services to all firms in the market. So, input price may decline to the zero profit condition when output increases and when new entrants make it more cost effective for the other firms services for the all firms in the market. So, we will see the graphical representation of the decreasing cost industry. So, this is a long run supply in case of decreasing cost industry D0 then we have D1 S0 we have S1. So, we have E0 we have E1. So, this is the first equilibrium this is the second equilibrium and if you do this then this is our long run supply curve because this is a decreasing cost industry expansion is at a decreasing cost per unit and that is the reason we get a downward sloping long run supply curve in case of the decreasing cost industry. So, in case of constant cost industry the long run supply curve is a straight line horizontal in case of increasing cost industry the long run supply curve is upward sloping because the cost of production increases when the scale of operations expand or when new firms enter into the market and in case of a decreasing cost industry the long run supply curve is downward sloping because the cost of production decreases when the firm or maybe the scale of operation increases at a decreasing cost per unit of production. Then we will see that what is the effect of tax or how the buyers and sellers they borne the tax imposition of the tax of the borne the burden of the tax in case of a perfect competitive market structure. So, we will talk about typically three type of tax one imposition of a lump sum tax second imposition of a profit tax and finally, the imposition of a specific sales tax. So, if you look at the lump sum tax it is the effect of lump sum tax is like a effect of the fixed cost because it is on it is the effect is on the fixed cost and if you look at the in the short run if there is a change in the fixed cost it is not going to change the it is not going to change the equilibrium position because till the time it is not affecting the marginal cost it is not going to change the equilibrium position and in case of similarly in case of profit tax again it is a the effect is like a fixed cost, but in the long run the possibility is that that supply will shift, but in case of specific sale tax the imposition of tax is dealt through the elasticity of supply and that talks about that how much is the sensitivity of the supplier with respect to change in the price. So, we will start our start our explanation for the imposition of the tax from the lump sum tax and lump sum tax is like it is one time lump sum. So, it is the effect is like a fixed cost at least in the short run there is no effect, but when it comes to long run maybe there is some effect because there may be decrease in the output. So, this is the average revenue that is marginal revenue here we get the short run total cost curve and this is the average fixed cost then there is a increase in the average fixed cost after the imposition of the tax that is why this is average fixed cost change in that average fixed cost and with the change in the average fixed cost the short run average cost curve is increasing that is SOTC 1 and marginal cost generally intersect the average variable cost and average cost at its minimum. So, if you look at in case of lump sum tax only there is a increase in the fixed cost and that shift the average total cost curve there are there is a change in the average total cost curve otherwise there is no much effect at least in the short run, but in the long run at least to the sum level of output it is going to influence, but if you look at if it is short run someone is just running the normal profit then in the long run he has to incur loss because of the lump sum tax, but in the short run if someone is getting super normal profit at least after imposition of tax he will get only the normal profit or there is some reduction in the amount of profit, but at least he is not incurring loss. So, in this situation at least they are getting affected through the lump sum tax because they are moving from one possibility to another possibility that is either from super normal profit to normal profit or from normal profit to loss then will take the effect of the profit tax. So, profit tax is also somehow in the same category that this is the effect of like change in the fixed cost, but sometimes due to this the supply changes at least in the long run and it has it leads to increase in the price. So, this is the demand curve, this is the supply curve, this is the equilibrium quantity, this is the equilibrium price. So, at least in the short run it is not much of change, but when it takes to the long run it is generally shift the supply to the up and that leads to increase in the price and decrease in the quantity demanded. So, the effect of the profit tax if you will see if it is much felt in the long run rather than the short run because short run it has nothing more to do or the effect is not much, but in case of a long run that leads to decrease in the supply because there is imposition of profit tax that leads to decrease in that leads to increase in the supply which leads to increase in the price and decrease in the quantity demanded. And what is the specific effect of on firm because of this profit tax again the same explanation if there are running super normal profit in the short run at least it is not much because they will just there will be some reduction in the profit, but if they are just getting the normal profit the possibility that they may land into incurring loss at least in the long run with the imposition of the profit tax. Now, we will analyze the case of specific sales tax and this effect of the specific sale tax is more on what is the elasticity of supply if the elasticity of supply is more generally the firms pay less for the tax and if it is less than the firm has to pay more for the tax. So, it is all about the elasticity of supply curve that decides that what is the effect of specific sales tax on buyers and what is the effect of specific sales tax on the seller. So, if you will take different scenario and we will see how the imposition of specific sale tax affecting the buyers and seller. So, if you take a regular demand curve and the supply curve then this is the demand curve this is the supply curve and when there is a imposition of tax that is shown through the change in the supply. So, in this case this is the tax and this is the change in the price after imposition of tax. So, if you look at here the entire tax amount is not passed to the consumer entire tax amount is not passed to the consumer in the form of increase in the price still this much amount is paid by the seller. So, if you look at here the imposition of the specific sale tax is equally on both the side buyers and seller if it is a case of the regular demand and supply curve. Now, suppose we will take another example where the supply curve is elastic than the previous case and here if you look at this is the amount of the tax and this is the change in the price. So, in this case if you make it a comparison between the first case and the second case if the supply since the supply curve is more elastic the major part of the burden of the tax is passed to the consumer in the form of increase in the price. But in case of the first case if you look at equally both the seller and buyer they were paying the tax amount, but here the supply curve is elastic. So, there is some leverage in the seller side to pass the burden of tax to the consumer in term of increase in the price and that is why here it is more as compared to this because the change in the price is more in case of the second case and by through change in the price generally the tax is passed to the consumer or may be majority portion of the tax is passed to the consumer. Then we will take a case where the supply curve is perfectly elastic and this is the demand curve here we can take the may be demand and supply and here the price. So, in this case if you look at this is the tax amount and the entire tax is passed to the consumer in the form of increase in the price because here the supply curve is perfectly elastic any small change in the price will lead to greater change in the supply and that is the reason if you look at the entire supply entire tax burden is passed to the consumer. So, more elastic is the market supply higher is the proportion of specific tax that can be passed to the consumer. So, more elastic is the supply higher the burden to the consumer. So, in case of lump sum tax and fixed tax in case of lump sum tax and profit tax the effect is like a fixed cost of production and if you look at it is not getting much of effect in case of short term, but in case of long run the possibility is that they may incur loss if they are just getting the normal profit. And in case of specific sales tax it is always the elasticity of supply that decides that how what is the effect of this imposition of tax on the sellers. If supply is more elastic burden is less if supply is less elastic the burden is more. We will look at some of this efficiency criterion and perfectly competitive market. So, if you remember in the initial class we talked about the allocative efficiency and productive efficiency. So, we will check in the first case what is the resource allocative efficiency in case of a perfectly competitive market. Any firm they produces they produce at the marginal revenue which is equal to the marginal cost and since marginal revenue is equal to P for competitive firm then P is also equal to marginal cost. Now, what is the meaning? Meaning here is the marginal benefit that is through demand and marginal cost that is supplier using the society resources. So, society marginal value of resources is equal to the opportunity cost of using resources and that is how we use the allocative efficiency or that is how the allocative efficiency gets satisfied in case of a perfectly competitive market. And when you again explain this through the consumer surplus and producer surplus if you look at the graph over here the consumer surplus is if you remember the at least the definition the consumer surplus is one where any price above the market price if the consumer is ready to pay more and if they are paying less generally they get some amount of the consumer surplus. So, consumer surplus area in specific graph if you look at ABPP is the consumer surplus area because that is the above the market price and supplier surplus is that is CBPE. So, that is again C P and B and competitive equilibrium maximizes the market surplus. Now, the question is what about Q 1 what is the what about the level of output. So, the second case is productive efficiency here firms produces at the minimum of average total cost in the long run and a firm economizing on resource use and if not competing firm would undercut its price and capture the extra profit. So, since the economizing on the resource use that is again satisfies the productive efficiency. Then we will see what is the application of perfect competitive market in the real world and we will take the typical example of stock market as I said the stock market share market somehow share at least some of the feature of the perfect competitive market. So, if you are taking the example of stock market whether this is a perfect competitive market in the real world let us analyze what are the similarity and what are the dissimilarity. The price of stock usually determined by the market forces of demand and supply of stock which goes with the perfect competitive market structure. Individual buyers and sellers have very little impact on prices as they are the price taker again the same situation what we generally face in case of a perfect competitive market structure. Perfect mobility of resources and here also the resources are mobile as stock is bought and sold frequently and information about the price and quantity are readily available. So, there is full information and perfect information to all the people those who are in the stock market buyers and seller. So, price decided by the market demand and market supply first feature individual buyer seller has less impact second feature perfect mobility of the resources third feature and full information about the product price fourth feature all these four features get matched or it comes from the characteristic of a perfect competitive market structure. Now, we need to see that whether there is imperfection, but before that we will see that whether like in before couple of minutes we are talking about the efficiency of the or whether the productive efficiency and allocative efficiency get satisfied in the perfect competitive market structure or not. So, to take that it is a Q and similarly say same thing happens in case of a stock market that fund flows into the stock and the resources flow into the huge and in which the rate of return. So, stock price provide a signal for the efficient allocation of investment in the economy. So, till the time all these features are matching with the perfect competitive market structure, but still there are some imperfection and that is why we cannot say that there in a rigid form there are the perfect competitive market structure, but somehow there is a close resemblance of this type of market structure with the perfect competitive market structure. Now, what are the what is the imperfection over here imperfection occurs here also those stock market is very close to perfect competition. For example, sale of huge amount of stock by a large corporation will affect the price of stock which goes against the characteristic of perfect competitive market structure that one seller or one buyer cannot influence the price of the product. So, to summarize we can say that perfect competitive market stock market closely come to the perfect competitive market, but still it is there are some imperfection occurs. So, in the next class again we will take one more example like whether credit card industry comes in the category of perfect competitive market structure or not and then we will start our discussion on the monopoly. So, to summarize whatever we discussed today is we talked about the market supply in the short run which is the segment of mc which lies above the average variable cost. We talk about the long run equilibrium we discussed about the long run supply curve in case of increasing cost industry, constant cost industry, decreasing cost industry and we talked about the imposition of tax and we talked about the allocative efficiency and productive efficiency whether that is getting satisfied in case of a perfect competitive market structure or not. So, we will carry forward our discussion of perfect competitive market structure application to real world and monopoly in the next session.