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Lecture 18 - Announcements HW for ch 8 due Thursday Exam 2...

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Announcements HW for ch 8 due Thursday Exam 2 is two weeks from Wednesday
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Long Run Adjustments Thought experiment: Suppose that the minimum ATC is $5 and the price is $5. This means zero profits in the industry. Now suppose demand increases due to a change in tastes.
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Long Run Adjustments LR Adjustment to an Increase in D Q P S D q P MR 1 MC AC D 1 MR 2 Q 1 Q 2 q 1 q 2 $7 $5
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Long Run Adjustments When the market demand curve shifts out, the price that firms face (their demand = marginal revenue curve) increases to $7 and firms increase production to q 2 in the SR and the market quantity increases to Q 2 .
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Long Run Adjustments The higher price and quantity in the firm graph indicates that these perfectly competitive firms are (temporarily) earning a positive economic profit. The positive economic profit is a signal to firms outside of the industry (signals that economic resources now have higher value in this industry than in others). More firms enter this industry as a result.
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Long Run Adjustments LR Adjustment to an Increase in D Q P S D q P MR 1 MC AC D 1 S 1 MR 2 Q 1 Q 2 Q 3 q 1 , q 3 q 2 $7 $5
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Long Run Adjustments Entry (and the increased production of existing firms) increases market supply. This increase in market supply reduces the market price to $5 and increases market output to Q 3 . Because firms now face a demand curve at P=$5, they go back to producing their original level of output, q 1 =q 3 (though there are more firms in this industry now). That’s how market Q increases but firm q returns to q 1 . These firms now make zero economic profit. NOTE: this assumes the industry in question is a “ constant cost industry ”. In other words, the costs remain the same despite the growth in total production. (more on this later)
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Long Run Adjustments LR Adjustment to an Increase in D Q P S D q P MR 1 MC AC D 1 S 1 MR 2 Q 1 Q 2 Q 3 q 1 , q 3 q 2 $7 $5
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Appendix EXTERNAL ECONOMIES AND DISECONOMIES
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