Econ 16 - Cite as: Chia-Hui Chen, course materials for...

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Unformatted text preview: Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Long Run Competitive Equilibrium 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 19, 2007 Lecture 16 Long Run Supply and the Analysis of Competitive Markets Outline 1. Chap 8: Long Run Equilibrium 2. Chap 8: Long Run Market Supply 3. Chap 9: Gains and Losses from Government Policies 1 Long Run Competitive Equilibrium In Figure1, an existing firms marginal cost and average total cost are SMC and SAC . The short-run market price is 7, so existing firms are making profits. In the long run, capital can be changed; old firms expand, new firms enter the market, thus the supply increases, which leads to price decreasing. The price will decrease until P = LMC = LAC , so that firms have no economic profit. In the long run, firms earn zero profit, and in the short run, firms can have positive profit. However, the short run profit is not always higher because firms can also have negative profit (when P < ATC ). 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 LAC LMC SAC SMC P x Figure 1: Long Run Equilibrium Price. 5 LMC 4.5 4 LAC 3.5 3 2.5 2 1.5 1 0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 S 1 S 2 D 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Q 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 LAC LMC 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Q 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 S 1 S 2 D 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Q Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu),(http://ocw....
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Econ 16 - Cite as: Chia-Hui Chen, course materials for...

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