Further increases in p make it worthwhile for higher

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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). 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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GESB 1006: Economics of Everyday Life University of Macau Efficiency of a Competitive Market Profit-maximization Q: MC = MR Perfect competition: P = MR So, in the competitive equilibrium: P = MC The competitive equilibrium is efficient Maximizes total surplus because P = MC MC is the cost of producing the marginal unit P is value to buyers of the marginal unit
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GESB 1006: Economics of Everyday Life University of Macau An Increase in Demand in the Short-Run and Long-Run (a) The market starts in a long-run equilibrium, shown as point A in panel (a). In this equilibrium, each firm makes zero profit, and the price equals the minimum average total cost. Price Price Quantity (market) 0 Market Quantity (firm) 0 Firm ATC MC (a) Initial Condition Short-run supply, S 1 Demand, D 1 Q 1 P 1 Long-run supply P 1 A 1. A market begins in long-run equilibrium… 2. …with the firm earning zero profit.
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GESB 1006: Economics of Everyday Life University of Macau An Increase in Demand in the Short-Run and Long-Run (b) Panel (b) shows what happens in the short run when demand rises from D 1 to D 2 . The equilibrium goes from point A to point B, price rises from P 1 to P 2 , and the quantity sold in the market rises from Q 1 to Q 2 . Because price now exceeds average total cost, each firm now makes a profit, which over time encourages new firms to enter the market. Price Price Quantity (market) 0 Market Quantity (firm) 0 Firm (b) Short-Run Response S 1 D 1 Q 1 P 1 Long-run supply P 1 A 3. But then an increase in demand raises the price… 4. …leading to short-run profits. D 2 B Q 2 P 2 P 2 MC ATC
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GESB 1006: Economics of Everyday Life University of Macau An Increase in Demand in the Short-Run and Long-Run (c) This entry shifts the short-run supply curve to the right from S 1 to S 2 , as shown in panel (c). In the new long-run equilibrium, point C, price has returned to P 1 but the quantity sold has increased to Q 3 . Profits are again zero, and price is back to the minimum of average total cost, but the market has more firms to satisfy the greater demand. Price Price Quantity (market) 0 Market Quantity (firm) 0 Firm (c) Long-Run Response S 1 D 1 Q 1 A D 2 B Q 2 P 2 MC ATC 5. When profits induce entry, supply increases and the price falls,… 6. …restoring long -run equilibrium. S 2 C Q 3 P 1 P 1 Long-run supply
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