Lecture%2010 - Econ 208 lecture 10 page 1 Lecture 10...

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Econ 208 lecture 10 page 1 Lecture 10: Economics of Long Run Supply Let’s review the crucial points from last week’s lecture on long-run supply. In long-run equilibrium supply adjusts so as to bring price down to minimum average total cost. Any price below this will cause firms eventually to go out of business or leave the business. Any price above this induces entry or expansion. Let’s consider a case where the market price is above average total cost. [draw graph with supply and demand: price projected onto cost curves of an individual firm. Note that the price = MC output level generates excess profit. 2. The important point about this case is that some input is earning more than its supply price. Usually it is the entrepreneurial input or the capital, but not always. An excess profit is a signal that there is money to be made putting resources in that industry, or augmenting the resource that is earning the excess return. This can be achieved through an increase in the firm’s output or through entry of other firms. Let’s suppose that it is through entry, and that the firm’s cost curves are replicated. 3. As firms enter the industry supply curve shifts to the right. Given demand, this causes price to fall. How far does it fall?
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