Over time profits induce entry to the right reducing P driving profits to zero

Over time profits induce entry to the right reducing

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Over time, profits induce entry, to the right, reducing P …driving profits to zero and restoring long-run eq’m. A B C
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Why the LR Supply Curve Might Slope Upward The LR market supply curve is horizontal if 1) all firms have identical costs, and 2) costs do not change as other firms enter or exit the market. If either of these assumptions is not true, then LR supply curve slopes upward.
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1) Firms Have Different Costs As P rises, firms with lower costs enter the market before those with higher costs. Further increases in P make it worthwhile for higher-cost firms to enter the market, which increases market quantity supplied. Hence, LR market supply curve slopes upward. At any P , For the marginal firm, P = minimum ATC and profit = 0. For lower-cost firms, profit > 0.
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2) Costs Rise as Firms Enter the Market In some industries, the supply of a key input is limited (e.g. , amount of land suitable for farming is fixed). The entry of new firms increases demand for this input, causing its price to rise. This increases all firms’ costs. Hence, an increase in P is required to increase the market quantity supplied, so the supply curve is upward-sloping.
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CONCLUSION: The Efficiency of a Competitive Market Profit-maximization: MC = MR Perfect competition: P = MR So, in the competitive eq’m: P = MC Recall, MC is cost of producing the marginal unit. P is value to buyers of the marginal unit. So, the competitive eq’m is efficient, maximizes total surplus.
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S U M M A RY For a firm in a perfectly competitive market, price = marginal revenue = average revenue. If P > AVC , a firm maximizes profit by producing the quantity where MR = MC . If P < AVC , a firm will shut down in the short run. If P < ATC , a firm will exit in the long run. In the short run, entry is not possible, and an increase in demand increases firms’ profits. With free entry and exit, profits = 0 in the long run, and P = minimum ATC .
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