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Lecture+17 - Announcements MT2 is 2 weeks from today...

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Announcements MT2 is 2 weeks from today! Starting ch. 9 on Friday HW for ch 8 now due Monday. HW for Ch 9 is still due next Thursday (so you have 2 LONG homeworks due in the same week). 1 of 26
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Short Run to Long Run In the short run, perfectly competitive firms can earn positive profits or negative profits. In the long run this is not possible. In the long run all PC firms MUST earn zero profit. In other words, in the long run, the price will be pushed down to the minimum average cost (AC). Remember this is the point where MC=AC. So in the long run we get P=MC=AC. Why does this happen? 2 of 36
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3 of 36 SHORT-RUN CONDITIONS A firm earning positive profits: Firm Earning Positive Profits in the Short Run
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Short Run to Long Run If firms in an industry earn positive economic profits (P>AC), then in the long run firms will enter this industry . Such entry will shift the supply curve out thus forcing prices down. Firms will keep entering until profits=0 4 of 36 Market Supply and Demand D S 1 S 2 P Q $5 $4.10 Q 1 Q 2
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5 of 36 LONG-RUN ADJUSTMENTS TO SHORT-RUN CONDITIONS If profits are positive, existing firms will continue to expand as long as there are economies of scale to be realized (as long as costs are falling), and new firms will continue to enter as long as positive profits are being earned. In the long run, equilibrium price ( P *) is equal to long-run average cost (which is the minimum of short-run average cost), short-run marginal cost, and short-run average cost. Profits are driven to zero: P* = SRMC = SRAC = LRAC where SRMC denotes short-run marginal cost, SRAC denotes short-run average cost, and LRAC denotes long-run average cost.
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6 of 36 LONG-RUN ADJUSTMENTS TO SHORT-RUN CONDITIONS SHORT-RUN PROFITS: EXPANSION TO EQUILIBRIUM Firms Expand in the Long Run When Increasing Returns to Scale Are Available
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7 of 36 LONG-RUN ADJUSTMENTS TO SHORT-RUN CONDITIONS THE LONG-RUN ADJUSTMENT MECHANISM: INVESTMENT FLOWS TOWARD PROFIT OPPORTUNITIES In efficient markets, investment capital flows toward profit opportunities. The actual process is complex and varies from industry to industry.
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