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

“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 increase = 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….

• 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

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.