Lecture 19 - Announcements • HW due tonight • HWs due...

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Unformatted text preview: Announcements • HW due tonight. • HWs due on Wednesday (11:45pm) until next midt er m!! • Star ting ch. 9 on Fr iday 1 of 26 Shor t Run t o Long Run (cont.) • I f fir ms in an industr y ear n negative profits in the shor t r un (P<AC), then in the long r un fir ms will exit (or drop out of) this industr y. • Such exit will shift the supply cur ve back thus forcing pr ices up. • Fir ms will keep exiting until the remaining fir ms get profits=0 2 of 36 3 of 36 LONG-RUN ADJUSTMENTS TO SHORT-RUN CONDITIONS SHORT-RUN LOSSES: CONTRACTION TO EQUILIBRIUM Long-Run Contraction and Exit in an Industry Suffering Short-Run Losses 4 of 36 LONG-RUN ADJUSTMENTS TO SHORT-RUN CONDITIONS As long as losses are being sustained in an industry, firms will shut down and leave the industry, thus reducing supply —shifting the supply curve to the left. As this happens, price rises. This gradual price rise reduces losses for firms remaining in the industry until those losses are ultimately eliminated. Whether we begin with an industry in which firms are earning profits or suffering losses, the final long-run competitive equilibrium condition is the same: P* = SRMC = SRAC = LRAC and profits are zero. At this point, individual firms are operating at the most efficient scale of plant—that is, at the minimum point on their LRAC curve. 5 of 36 LONG-RUN ADJUSTMENTS TO SHORT-RUN CONDITIONS Investment—in the form of new firms and expanding old firms— will over time tend to favor those industries in which profits are being made, and over time industries in which firms are suffering losses will gradually contract from disinvestment. long-run competitive equilibrium When P = SRMC = SRAC = LRAC and profits are zero. 6 of 36 LONG-RUN ADJUSTMENTS TO SHORT-RUN CONDITIONS Long Run Adjustments • Thought exper iment: • Suppose that the minimum ATC is $5 and the pr ice is $5. This means zero profits in the industr y. • Now suppose demand increases due to a change in tast es. 7 of 36 Long Run Adjustments 8 of 36 LR Adjustment to an Increase in D Q P S D q P MR 1 MC AC D 1 MR 2 Q 1 Q 2 q 1 q 2 $ 7 $ 5 Long Run Adjustments • When the market demand cur ve shifts out, the pr ice that fir ms face (their demand = marginal revenue cur ve) increases t o $7 and fir ms increase production t o q 2 in the SR and the market quantity increases t o Q 2 ....
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This note was uploaded on 06/21/2009 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 19 - Announcements • HW due tonight • HWs due...

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