Perfectly competitive market: effects of AFC curve shift?
In a perfectly competive industry, suppose the gov't imposes a lump sum tax (fixed cost) on every individual firm. This will shift the ATC curve upwards and hence each firm in the short run will be at a loss. Now in the long run, firms will start exiting the industry, shifting the supply curve for the industry to the left, raising the price until ATC=MC=P right? So the level of output for the industry has decreased & price has increased. BUT my question is: does the output for an individual firm (still in business) increase in the long run (once economic profits are back to zero at the higher price)??
- sensekonomikxLv 71 decade agoFavorite Answer
You are right. In reality, that is exactly what happens. There is no inconsistency with what you expect about some individual firms expanding their output in the long-run. For this you have to realise that the extent of the shifts as some firms exit the industry due to loses will be counteracted by shifts the more successful surviving firms to reduce their cists through scale, technology and work method changes and hence their individual ATC curves shift, or, they work on their longrun ATC curves which is kind of lower enveloping of short run ATC curves. So, what you say is correct. This is exactly the meaning of perfect competition. The output may well expand again for some of the surviving units as they take the market left by those who exited.
- deprizioLv 43 years ago
In perfect opposition, companies are assumed to have no industry power (i.e. horizontal call for curves) so Anjaree is faulty. the supply curve will shift to the left maximum well known to much less output however an identical fees.