Entry - Normal Profit The money that an investor could earn...

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1 Entry 1. Free entry. 2. Implications of free entry. 3. Normal profits. 4. Barriers to entry. Free Entry A market has free entry if, in the long run: (1) New firms can freely enter the market. (2) Every firm in the market has the same long run cost curves. Implications of Free Entry In a competitive market with free entry, positive profits attract new entrants. => supply increases => price falls The very long run is a time long enough for all firms who want to enter or exit to do so. Rule: In the very long run, in a market with free entry, economic profits are zero. Very Long Run Supply In a competitive market with free entry, in the very long run: The equilibrium price is driven down to the minimum long run average cost. We say that the very long run supply curve is perfectly elastic at that price.
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Unformatted text preview: Normal Profit The money that an investor could earn by investing elsewhere is the opportunity cost of capital (OCC). Normal profit is what a firm must earn to compensate investors for the OCC. Normal profit is not economic profit. A firms economic profit is its profit in excess of normal profit. Summary: Profit in the Very Long Run In the very long run, with free entry: Firms earn only normal profit. Economic profit is zero. 2 Barriers to Entry A barrier to entry is anything that allows a firm to earn economic profits indefinitely, because it keeps entrants out. Created by government. Absolute cost advantages. Better technology. Better access to inputs. First-mover advantages. Three kinds of barriers:...
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Entry - Normal Profit The money that an investor could earn...

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