Long Term Market Equilibrium

Long Term Market Equilibrium - • Profits are “normal”...

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Long Term Market Equilibrium If an individual firm is making a profit, then a new firm will gladly enter the market in the long run Supply shifts down in the market Firms enter market due to profit opportunity Shifts supply curve out Lowering prices and profit to 0 Firm Losing Money Situation Individual firm has MR below ATC, but above AVC Firms will go out of business In the long run, the market will shift supply upward In addition, the individual firms will shift MR up Long Run Economic Profit When economic profit = 0, this is referred to as being “normal profits”
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Unformatted text preview: • Profits are “normal” because each resource within the firm is earning a return that is neither greater or less than its next best employment possibility (its opportunity cost) • Not the same as accounting profit Long run equilibrium • Key conclusion: perfect competition is said to be efficient because in the long-run equilibrium: o Economic profits tend toward zero o The total costs (ATC) to produce each unit of a good and service is at a minimum (at the lowest possible point on the ATC curve)...
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