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Long Run Market Supply is Horizontal (p. 306)

Long Run Market Supply is Horizontal (p. 306). Entry and Exit will end when P=MC at min. of ATC = Long Run Equilibrium (Efficient Scale) Only one price is consistent with Zero Economic Profit….so the Long Run MARKET Supply curve must be horizontal at this price.

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Long Run Market Supply is Horizontal (p. 306)

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  1. Long Run Market Supply is Horizontal (p. 306) • Entry and Exit will end when P=MC at min. of ATC = Long Run Equilibrium (Efficient Scale) • Only one price is consistent with Zero Economic Profit….so the Long Run MARKET Supply curve must be horizontal at this price. • Consider a horizontal long run S curve: a. if P goes above = profit = entry = increase total Q supplied b. if P goes below = loss = entry = decrease total Q supplied c. eventually, number of firms adjusts so the P = min ATC and there are enough firms to satisfy all the Demand at this price

  2. “Constant Cost” Industriesex in 2005 AP FRQ #1 As D shifts right, P rises and firms end up with economic profits Profits = Entry: As new firms enter , it would increase the D for factors of production (inputs); as D for these increse = the price for factors of production increase (inputs P rise) ……this would change the firms cost curves This would completely change our model…so…. We use a “constant cost” industry to keep our model simple….

  3. So as new firms enter … • We assume there is no increase in the costs of production which allows us to keep our MC and ATC costs the same • …..By the way…if we did allow for “Increasing cost” industries (most are in reality) , we would face an ATC curve that shifts …. • up (if Profit = Entry) and therefore the new efficient scale would be at a ….. • higher price • The new long run equilibrium would be at a ….. • higher price and therefore we would have a long run market supply curve that is ….. • upward sloping rather than……. • horizontal as is the case in our model • Could discuss decreasing costs with the opposite example with losses and exit

  4. 2011 #2 • 2. Assume that the market for avocados is perfectly competitive. The typical firm is earning positive economic profit in the short-run equilibrium. • (a) Draw a correctly labeled graph for the typical firm, illustrating the short-run equilibrium and labeling the equilibrium market price and output PE and QE, respectively. • (b) Assume there is an increase in the market wage rate for labor, a variable input. Show on your graph in part (a) the effect of the wage increase on the marginal cost curve in the short run.

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