some people work faster than others and in part because some people have better alternative uses of their time than others. For any given price, those with lower costs are more likely to enter than those with higher costs. To increase the quantity of painting services supplied, additional entrants must be encouraged to enter the market. Because these new entrants have higher costs, the price must rise to make entry profitable for them. Thus, the long-run market supply curve for painting services slopes upward even with free entry into the market. Notice that if firms have different costs, some firms earn profit even in the long run. In this case, the price in the market reflects the average total cost of the marginal firm — the firm that would exit the market if the price were any lower. This firm earns zero profit, but firms with lower costs earn positive profit. Entry does not eliminate this profit because would-be entrants have higher costs than firms already in the market. Higher-cost firms will enter only if the price rises, making the market profitable for them. Thus, for these two reasons, a higher price may be necessary to induce a larger quantity supplied, in which case the long-run supply curve is upward sloping rather than horizontal. Nonetheless, the basic lesson about entry and exit remains true. Because firms can enter and exit more easily in the long run than in the short run, the long-run supply curve is typically more elastic than the short-run supply curve. Quick Quiz In the long run with free entry and exit, is the price in a market equal to marginal cost, average total cost, both, or neither? Explain with a diagram. 14-4Conclusion: Behind The Supply Curve We have been discussing the behavior of profit-maximizing firms that supply goods in perfectly competitive markets. You may recall from Chapter 1 that one of the Ten Principles of Economics is that rational people think at the margin. This chapter has applied this idea to the competitive firm. Marginal analysis has given us a theory of the supply curve in a competitive market and, as a result, a deeper understanding of
market outcomes. We have learned that when you buy a good from a firm in a competitive market, you can be assured that the price you pay is close to the cost of producing that good. In particular, if firms are competitive and profit maximizing, the price of a good equals the marginal cost of making that good. In addition, if firms can freely enter and exit the market, the price also equals the lowest possible average total cost of production.
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