Long run supply curve is horizontal at the price Why do competitive firms stay in business if they make zero profit? The zero-profit includes the initial outlay of capital, making the accounting profit that amount because opp. cost isn’t included in accounting profit A Shift in Demand in the Short Run and Long Run Demand increases, leading to short run profits People enter market, supply increases, back to long run equilibrium Why the Long Run Supply Curve Might Slope Upward Resources might be available in limited quantities, increase in demand increases costs, which increases price Firms may have different costs, if new entrants into the market have higher costs, the price will adjust up If the curve is sloping up, some firms will have profit in the long run The price in the market reflects the ATC of the marginal firm Because can enter and exit more easily in the long run, the long run supply curve is typically more elastic than the short run supply curve Conclusion: behind the supply curve Firms, as well as people, think at the margin Price of a good = marginal cost of making it Price = lowest possible ATC
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