microbook_3e-page120 - Eric Doviak Principles of...

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Eric Doviak Principles of Microeconomics Notes on the Zero-Profit Result In Lecture 6, I gave an example of a firm operating in a competitive industry that makes zero profit in the short-run, but I didn’t explain when such a situation would arise. Firms in competitive industries may make positive profits in the short-run, but – if there is free entry into the industry and firms face constant returns to scale over some range of output – then in the long-run, the firms’ profits will be driven to zero. one reason why profits go to zero in the long run Suppose that there is free entry into the industry in which my firm operates, that the technology I use is widely available and that my firm is making positive profits in the short run. Since I’m making positive profits, another person (call him John) will use the same technology that I am using to produce output. John will enter the industry, increase the market supply and lower the market price. This will reduce my profit, but if John and I
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.

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