When economic profit reaches zero entry stops if

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Unformatted text preview: and the market supply curve shifts leftward. The market price rises and economic loss decreases. Eventually, economic loss is eliminated and exit stops. To summarize: s s s s s New firms enter a market in which existing firms are making an economic profit. As new firms enter a market, the market price falls and the economic profit of each firm decreases. Firms exit a market in which they are incurring an economic loss. As firms leave a market, the market price rises and the economic loss incurred by the remaining firms decreases. Entry and exit stop when firms make zero economic profit. 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 206 CHAPTER 10 Perfect Competition 206 A Closer Look at Entry A Closer Look at Exit The sweater market has 800 firms with cost curves like those in Fig. 10.9(a). The market demand curve is D, the market supply curve is S1, and the price is $25 a sweater in Fig. 10.9(b). Each firm produces 9 sweaters a day and makes an economic profit. This economic profit is a signal for new firms to enter the market. As entry takes place, supply increases and the market supply curve shifts rightward toward S*. As supply increases with no change in demand, the market price gradually falls from $25 to $20 a sweater. At this lower price, each firm makes zero economic profit and entry stops. Entry results in an increase in market output, but each firm’s output decreases. Because the price falls, each firm moves down its supply curve and produces less. Because the number of firms increases, the market produces more. The sweater market has 1,200 firms with cost curves like those in Fig. 10.9(a). The market demand curve is D, the market supply curve is S2, and the price is $17 a sweater in Fig. 10.9(b). Each firm produces 7 sweaters a day and incurs an economic loss. This economic loss is a signal for firms to exit the market. As exit takes place, supply decreases and the market supply curve shifts leftward toward S*. As supply decreases with no change in demand, the market price gradually rises from $17 to $20 a sweater. At this higher price, losses are eliminated, each firm makes zero economic profit, and exit stops. Exit results in a decrease in market output, but each firm’s output increases. Because the price rises, each firm moves up its supply curve and produces more. Because the number of firms decreases, the market produces less. Price and cost (dollars per sweater) Zero economic profit MC ATC 25 MR1 20 MR* 17 MR2 Price (dollars per sweater) Entry, Exit, and Long-Run Equilibrium F IGURE 10.9 S1 S* S2 25 20 Long-run equilibrium 17 D 0 6 7 8 9 10 Quantity (sweaters per day) (a) Campus Sweaters Each firm has cost curves like those of Campus Sweaters in part (a). The market demand curve is D in part (b). When the market supply curve in part (b) is S1, the price is $25 a sweater. In part (a), each firm produces 9 sweaters a day and makes an economic profit. Profit triggers the entry of new firms and as new firms enter, the market supply curve shifts rightward, from S1 toward S*. The price falls from $25 to $20 a sweater, and the quantity produced increases from 7,200 to 8,000 sweaters. Each firm’s output decreases to 8 animation 0 7.2 8.0 8.4 Quantity (thousands of sweaters per day) (b) The sweater market sweaters a day and economic profit falls to zero. When the market supply curve is S2, the price is $17 a sweater. In part (a), each firm produces 7 sweaters a day and incurs an economic loss. Loss triggers exit and as firms exit, the market supply curve shifts leftward, from S2 toward S*. The price rises from $17 to $20 a sweater, and the quantity produced decreases from 8,400 to 8,000 sweaters. Each firm’s output increases from 7 to 8 sweaters a day and economic profit rises to zero. 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 207 O utput, Price, and Profit in the Long Run Economics in Action Entry and Exit An example of entry and falling prices occurred during the 1980s and 1990s in the personal computer market. When IBM introduced its first PC in 1981, IBM had little competition. The price was $7,000 (about $16,850 in today’s money) and IBM made a large economic profit selling the new machine. Observing IBM’s huge success, new firms such as Gateway, NEC, Dell, and a host of others entered the market with machines that were technologically identical to IBM’s. In fact, they were so similar that they came to be called “clones.” The massive wave of entry into the personal computer market increased the market supply and lowered the price. The economic profit for all firms decreased. Today, a $400 computer is vastly more powerful than its 1981 ancestor that cost 42 times as much. The same PC market that saw entry during the 1980s and 1990s has seen some exit more recently. In 2001, IBM, the firm that first launched the PC, announced that it was exiting the market. The intense competition from Gateway, NEC, Dell, and others that entered the market following IBM’s lead has...
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This note was uploaded on 01/10/2013 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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