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- Perfect Competition in the Long Run Overview:
Long Run: Entry & Exit
- Short-run equilibrium \, → \, economic loss, profit, or breaks-even
- Long-run equilibrium \, → \, firm always breaks-even
- Firm incentive to enter market when p > ATC
- Firm exits market when p < ATC
Long-Run: Changes to Demand
- Firm starts by making zero profit
- Increase in Demand \, → \, Economic profit
- Firms enter market \, → \, increase in supply until firms break-even
- Decrease in Demand \, → \, Economic Loss
- Firms exit market \, → \, decrease in supply until firms break-even
Long-Run: Changes to Supply as Technology Advance
- Firms start by making zero profit
- Technology advance decrease MC \, & \, ATC \, → \, economic profit
- Firms enter market \, → \, increase in supply until firms break-even
- Predicting Prices for Exiting & Entering the Market
Suppose the market is perfectly competitive, and you are given the following graph:- If the equilibrium price is $9, will firms leave or enter the market?
- If the equilibrium price is $5, will firms leave or enter the market?
- Suppose the market is perfectly competitive, and you are given the following information
- At what price will some firms exit the market in the long run?
- At what price will some firms enter the market in the long run?
- What is the market price in the long run?
- Understanding Changes to Demand and Supply in the Long Run
Suppose the equilibrium price and quantity is that the shutdown point. If there is an increase in demand, does that automatically assume there is economic profit? - All the firms are currently breaking even. Suppose a natural disaster destroys all the firm's low-cost plant. All the firms now must switch to a high-cost plant. Describe what happens to the marginal cost, average total cost. Do the firms still breakeven? What happens to the market in the long run? Show this graphically.
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