Overview
This lecture examines how perfectly competitive markets adjust in the long run, focusing on firm entry, exit, and the role of constant costs.
Long Run in Perfectly Competitive Markets
- The long run is a period when firms can freely enter or exit the market and all costs become variable.
- In the long run, firms in perfectly competitive markets make zero economic profit (including opportunity costs).
Price Taker Behavior & Economic Profits
- Firms are price takers; the market price is set by supply and demand equilibrium.
- Zero economic profit occurs when marginal revenue equals average total cost for each unit.
- Economic profit considers opportunity cost; zero economic profit does not mean no accounting profit.
Demand Increase & Short Run Response
- An increase in demand (e.g., positive news about apples) shifts the market demand curve right.
- Short run result: equilibrium price and quantity rise, increasing firms' marginal revenue and output.
- Firms make positive economic profit in the short run as price exceeds average total cost.
Long Run Adjustment & Entry of Firms
- Positive economic profit attracts new firms, shifting the market supply curve to the right.
- Entry continues until economic profits return to zero (price returns to intersection of marginal revenue and average total cost).
- In a constant cost industry, entry/exit does not change firms’ cost structures.
Constant Cost Industry & Long Run Supply Curve
- In constant cost perfectly competitive markets, the long run supply curve is a horizontal line at the original price.
- Final equilibrium: higher quantity produced, price returns to original level, firms earn zero economic profit.
Key Terms & Definitions
- Long Run — A time period in which all inputs and costs are variable, and firms can enter or exit the market.
- Economic Profit — Profit accounting for both explicit costs and opportunity costs.
- Marginal Revenue — The additional revenue from selling one more unit.
- Price Taker — A firm that must accept the market price, unable to influence it.
- Constant Cost Industry — An industry where adding or removing firms does not affect individual firm costs.
- Long Run Supply Curve — Shows the relationship between price and quantity supplied after all adjustments; horizontal in a constant cost market.
Action Items / Next Steps
- Review how changes in input costs can affect cost structures when firms enter or exit a market.
- Prepare for discussion on increasing or decreasing cost industries in upcoming lectures.