ECO 09 - 17 NOV - Lecture 08 ECO 100Y5Y 10 November 2008 A....

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Lecture 08 10 November 2008 ECO 100Y5Y A. Cohen E C O N O M I C S PARKIN BADE Lecture 9 17 November 2008 Output, Price, and Profit in the Long Run LRAC curve has 3 possible shapes U-shaped (economies of scale, constant returns to scale, diseconomies of scale) L-shaped (economies of scale, constant returns to scale) \ -shaped (economies of scale only) Theory perfect competition only consistent with U-shaped LRAC continued Figure 11.9 Plant Size and Long-Run Equilibrium 0 P Q SRAC 1 SRAC 0 MC o MC 1 LRAC 25 6 MR 0 Short-run profit-maximizing point 20 8 MR 1 m Long-run competitive equilibrium
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Lecture 08 10 November 2008 ECO 100Y5Y A. Cohen Economic profit/loss are signals for firms to enter/exit industry reallocation of resources economic profit new entry rightward shift industry S P elimination profit economic loss existing firms exit leftward shift industry S P elimination loss Modified Fig. 11.10 (chalkboard) continued In long-run competitive equilibrium MR = P = MC ; (firms maximize short-run profits) P = minimum ATC ; (economic profits are zero; no incentive for firms to enter or exit) P = minimum LRAC ; (optimum plant size; no incentive for firm to change plant size) Changing Tastes and Advancing Technology Long-run industry supply curve shows how industry quantity supplied varies as market price varies after all possible adjustments, including changes in plant size and number of firms Shape of long-run industry supply curve depends on existence of external economies or diseconomies continued
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Lecture 08 10 November 2008 ECO 100Y5Y A. Cohen External economies — factors beyond control of firm that lower costs as industry output External diseconomies — factors beyond control of firm that raise costs as
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ECO 09 - 17 NOV - Lecture 08 ECO 100Y5Y 10 November 2008 A....

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