In the long run all firms earn zero economic profit

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Unformatted text preview: ic profit. Adjustment to the long run occurs via: – Entry and exit – Changes in plant size Short-Run Equilibrium: Firm Short-Run P MC Economic profit P = $25 25.00 ATC 20.33 20.14 20.00 17.00 Normal profit P = $20 Economic loss P = $17 0 7 8 9 Q Price and cost (dollars per pizzas) Economic Profit 30.00 25.00 MC ATC MR Economic profit profit 20.33 15.00 0 9 10 Quantity (pizzas per day) Price (dollars per pizza) Entry Entry Entry Entry increases increases supply S1 S0 25 20 17 D1 0 6 7 8 9 As new firms As enter an industry, the price falls and the economic profit of each existing firm decreases. decreases. 10 Quantity (thousands of pizzas per day) Price and cost (dollars per pizza) Normal Profit 30.00 25.00 MC Break-even point 20.00 ATC MR 15.00 0 8 10 Quantity (pizzas per day) (pizzas Price and cost (dollars per pizza) Economic Loss 30.00 MC ATC 25.00 20.14 17.00 0 Economic Economic loss MR 7 10 10 Quantity (pizzas per day) Price (dollars per pizza) Exit Exit S0 S2 23 Exit decreases supply 20 17 D1 0 6 7 8 9 10 Quantity (thousands of pizzas per day) As firms leave As an industry, the price rises and the economic loss of each remaining firm decreases. decreases. Price and cost (dollars per pizza) Normal Profit 30.00 25.00 MC Break-even point 20.00 ATC MR 15.00 0 8 10 Quantity (pizzas per day) (pizzas Changes in Plant Size Changes When a firm changes its plant size, it can lower its costs and increase its economic profit. Price (dollars per pizza) Plant Size and Plant Long-Run Equilibrium Long-Run Short-run profit 40 MC0 maximizing point SRAC0 LRAC MC1 25 20 m 14 6 8 SRAC1 MR0 MR1 Long-run competitive equilibrium Quantity (pizzas per day) (pizzas Long-Run Equilibrium Long-Run • Long-run equilibrium occurs in a competitive industry when firms are earning normal profit and economic profit is zero. • Economic profits draw in firms and cause existing firms to expand. • Economic losses cause firms to leave and cause existing firms to scale back. Changing Tastes and Advancing Technology Adva...
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This document was uploaded on 03/14/2014.

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