Overheads 8 - Perfect Competition

The industry if existing firms have zero profits there

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Unformatted text preview: Market Case 1: Firm making a profit Case 2: Firm making a loss but covering its average variable costs Case 3: Firm making a loss but NOT covering its average variable costs (ii) Long Run Decision Entry/Exit  ­  ­  ­ If existing firms have positive econ profits, new firms have an incentive to enter the industry. If existing firms have zero profits, there are no incentives for new firms to enter, and no incentives for existing firms to exit. If existing firms have economic losses, there is an incentive for existing firms to exit the industry The Long Run Adjustment Process to Zero Profit Consider a competitive industry that is in long ­run equilibrium, say with 1,000 identical firms. Now suppose that the market demand for the industry’s product increases, resulting in the existing firms making a SR profit. LR Adjustment Process: 1. Positive profits attract new firms. 2. Entry leads to an increase in supply and a decline in price. 3. Pos...
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