hi everybody Jacob Reed here from revieweecon.com today we're going to be talking about perfectly competitive firms in the long run if after watching this video you still need a little more help head over to review econ.com and pick up the total review booklet it has everything you need to know to Ace your microeconomics or macroeconomics exam let's get into the content now as we learned in our last video perfectly competitive firms can make economic profits or economic losses in the short run but in the long run perfectly competitive firms are going to break even that means they earn zero economic profit which is also called normal profit which is to say that their accounting profit is equal to the income they could earn doing something else with their resources and the reason why perfectly competitive firms break even in the long run is due to low barriers to entry so let's remind ourselves how to draw a zero economic profit first of all we have our supply and demand graph with our equilibrium price and equilibrium quantity marked that equilibrium price moves on over to the firm graph and the price for the firm is equal to the price in the market because perfectly competitive firms are price takers and they have no influence on the price they can charge the price is determined by the market that price from the market becomes their marginal revenue demand average revenue and price or Mr darp if we throw in a marginal cost curve we can now find our profit maximizing quantity of output that is found where Mr equals MC and from there we drop down to find the profit maximizing quantity of output for this firm in order to have this firm breaking even the average total cost curve must be tangent to the marginal cost equals marginal revenue point at the intersection for the firm so when we draw in that ATC we need to remember that the ATC must be at its minimum point where it intersects the marginal cost curve as well and this firm is breaking even because at the price of PF the average revenue and the average cost are equal and this scenario is called long run equilibrium because this is where firms will be in the long run because of low barriers to entry so next we're going to talk about how firms move from short-run equilibrium to Long Run equilibrium here we have a firm earning economic profits and make sure you know these steps on how we get to the long run from this situation this firm is earning economic profits those economic profits are going to cause other firms to seek that economic profit that means firms are going to enter the market here to compete and when firms enter the market the supply within the market is going to shift to the right that drives down the price within the market and with it it lowers the price for the firm that lower price for the firm shifts the marginal revenue demand average revenue and price downward until it equals the minimum of the average total cost curve this lower level of output and breaks even in the long run next let's take a look at what happens when a firm is earning economic losses that economic loss will only be a short run situation because in the long run firms are going to flee the economic loss some of those firms will exit the market not in the short run but in the long run and that will cause a leftward shift of the market supply curve that increases the price and decreases the quantity in the market and that increases the firm's marginal revenue demand average revenue and price it causes them to produce a higher Mr equals MC quantity and we now produce at the minimum of the average total cost curve which means the firm breaks even in the long run and just keep in mind that the profit or loss box does not connect to the new Mr Dart curve it's either above or below the new Mr Dart depending on if we started with a loss or profit and because we are always moving to Long Run equilibrium the firm's price and quantity of output will always be the same in the long run let me show you what I mean by starting off with a firm that is in long-run equilibrium and breaking even if we have an increase in the demand for this product that is going to increase the price and cause the firm to earn economic profits in the short run firms are now going to enter the market seeking that economic profit that's going to increase the supply in the market driving that marginal revenue demand average revenue and price back down to exactly where it was before in the long run the increase in demand did not change the price and it did not change the quantity of output for the firm it did however increase the quantity within the market but we have more firms producing that higher quantity if we go back to the beginning again and this time we have a decrease in the demand that's going to cause the firm to earn economic losses in the short run as the marginal revenue demand average revenue and price shift downward the firm is now earning economic losses and producing a lower quantity of output in the short run but now firms are going to exit the market as they flee the economic losses that shifts the supply curve to the left driving the price back where it was before and so in the long run the price remained at PE and the firm's quantity of output what remained at qf so in the market however we are producing lower quantities of output because we have fewer firms producing next we're going to talk a little bit about efficiency in regards to perfectly competitive markets and firms as you have already learned perfectly competitive markets at equilibrium are allocatively efficient because they maximize consumer surplus but the firm within a perfectly competitive market is also going to be allocatively efficient and that's because they price at marginal cost would they do that in the long run as we have here we're at qf the marginal cost equals that price curve or Mr darp and that allocatively efficient point is found right there at the intersection of MC and Mr dark curve but if the firm is earning economic losses the firm is still allocatively efficient because at qf the MC equals the price and the same is true if they are earning economic profits in the short run they produce where MC equals the price and so perfectly competitive firms are always allocatively efficient but when it comes to productive efficiency The Firm will only be productively efficient in the long run remember productive efficiency means that a firm is producing at the minimum average total cost and this firm is producing at qf qf1 here is the productively efficient quantity but that quantity would not maximize profit and if the firm is earning economic losses the productively efficient will be higher than their current level of output there at qf1 and so it is only when the firm is in Long Run equilibrium that the quantity of output is found at the minimum of the average total cost curve so in the long run perfectly competitive firms are productively efficient just not in the short run so the last thing you need to know is about different types of cost Industries perfectly competitive constant cost Industries are what we've already been seeing throughout this video and that is the Baseline assumption within microeconomics if it isn't specified you can assume that a perfectly competitive firm is operating in a constant cost industry as we already saw within the market for a constant cost industry in the long run the market can produce high or low levels of output at a single price and since all of these quantities of output can be produced at a single price that means we have a long run supply curve that is perfectly elastic in a perfectly competitive constant cost industry and the reason for this is because the long run average total cost curve is constant in a constant cost industry and that means that in the long run every firm will have a quantity of output that is at the minimum of the average total cost curve and that average total cost Curve will not move as firms enter or exit the market and that's what it means for us to have a constant cost industry the average total cost for a firm doesn't change as new firms enter or exit the market now there aren't a lot of questions about the next two industries but you should be aware of them with an increasing cost industry the average total cost curve for each individual firm will shift up as new firms enter the market or down as firms exit the market and the reason for this is because the long run average total cost curve for the entire industry is upward sloping at one level of capacity for the market we're going to have a low average cost for each firm but as firms enter the market the average costs are going to rise and that's going to mean that the long run prices in the market are also going to rise to the new higher minimum of the average total cost curve that gives us a upward sloping long run supply curve within the market and finally we have our decreasing cost industry in this industry firms average total cost curves are going to shift downward as new firms and to the market and that's because the industry's long-run average total cost curve is downward sloping the industry is experiencing economies of scale and so as the market increases output the average total cost and the Market's price will shift down which means that the long run supply curve within the market is actually downward sloping and this is the only reference to a downward sloping supply curve within this class but that's only in the long run the rest of the supply curves slope upward like we expect and there you have it that is everything you need to know about perfectly competitive firms in the long run if after watching this video you still need a little more help head over to review econ.com and do the graph drawing practice for perfectly competitive firms and then pick up the total review booklet because it has everything you need to know to Ace your microeconomics or macroeconomics exams that's it for now I'll see y'all next