Lecture 08 - Introduction to Introduction Economics...

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© Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Introduction to Economics Economics Lecture 8: Lecture 8: Long Long - - Run Competitive Run Competitive Equilibrium Equilibrium
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© Gustavo Indart Slide 2 Competitive Industry Adjustment Competitive Industry Adjustment in the Long in the Long - - Run Run ± The quantity of capital is fixed in the short-run for both existing and potential firms in the industry ¾ That is, the total capital employed in the industry is fixed in the short-run ¾ Therefore, the number of firms in the industry is fixed in the short-run ± In the long-run, firms can change the level of capital and can enter or exit the industry ± The long-run industry adjustment thus implies ¾ Change in the number of firms ¾ Changes in the scale of production of each firm
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© Gustavo Indart Slide 3 Competitive Industry Adjustment Competitive Industry Adjustment in the Long in the Long - - Run Run (continued) (continued) ± Why would the number of firms change in the long- run? ¾ If existing firms in the industry are making economic profits, new firms will enter the industry in the long- run ¾ If existing firms in the industry are making economic losses, they will exit the industry in the long-run ± The assumption of profit maximization implies that the number of firms will change in the long-run
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© Gustavo Indart Slide 4 Competitive Industry Adjustment Competitive Industry Adjustment in the Long in the Long - - Run Run (continued) (continued) ± Why would a firm change its production capacity in the long-run? ¾ Firms can increase profits in the long-run through an increase or decrease in their production capacity ¾ As long as a different production capacity can produce an output at a lower cost, firms will change the size of their plants ± The assumption of profit maximization implies that the production capacity of the firm will change in the long- run
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© Gustavo Indart Slide 5 Change in the Number of Firms
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Lecture 08 - Introduction to Introduction Economics...

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