Gesb 1006 economics of everyday life university of

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GESB 1006: Economics of Everyday Life University of Macau The Zero-Profit Condition Long-run equilibrium The process of entry or exit is complete Remaining firms earn zero economic profit Zero economic profit : when P = ATC Since firms produce where P = MR = MC The zero-profit condition is P = MC = ATC Recall that MC intersects ATC at min ATC Hence, in the long run, P = min ATC
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GESB 1006: Economics of Everyday Life University of Macau The Zero-Profit Condition Long-run equilibrium The process of entry or exit is complete Remaining firms earn zero economic profit Zero economic profit : when P = ATC Since firms produce where P = MR = MC The zero-profit condition is P = MC = ATC Recall that MC intersects ATC at min ATC Hence, in the long run, P = min ATC
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GESB 1006: Economics of Everyday Life University of Macau The Zero-Profit Condition Why do competitive firms stay in business if they make zero profit? Profit = total revenue total cost Total cost includes all implicit costs like the opportunity cost of the owner’s time and money Zero-profit equilibrium Economic profit is zero Accounting profit is positive
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GESB 1006: Economics of Everyday Life University of Macau Long-Run Market Supply Curve MC Market Q P (market) One firm Q P (firm) In the long run, the typical firm earns zero profit. LRATC long-run supply P = min. ATC The LR market supply curve is horizontal at P = minimum ATC .
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GESB 1006: Economics of Everyday Life University of Macau Short-Run and Long-Run Effect of an Increase in Demand S 1 Profit D 1 P 1 long-run supply D 2 MC ATC P 1 Market Q P (market) One firm Q P (firm) P 2 P 2 Q 1 Q 2 S 2 Q 3 A firm begins in long- …but then an increase in …leading to SR profits for the firm. 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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GESB 1006: Economics of Everyday Life University of Macau Long-Run Supply Curve Long-run supply curve is horizontal if: All firms have identical costs, and And costs do not change as other firms enter or exit the market Long-run supply curve might slope upward if: Firms have different costs Or costs rise as firms enter the market
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GESB 1006: Economics of Everyday Life University of Macau Long-Run Supply Curve 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
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GESB 1006: Economics of Everyday Life University of Macau Long-Run Supply Curve 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).
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