Adjustment to Long Run Equilibrium

•If most firms are making abnormal (economic) profits in the short run, this encourages the entry of new firms into the industry driven into the market by the profit motive
•This will cause an outward shift in market supply forcing down the market price 
•The increase in market supply will eventually reduce the price until price = long run average cost
•At this point, each firm in the industry is making normal profit where price (AR) = average cost
•Other things remaining the same, there is no further incentive for movement of firms in and out of the industry and long-run equilibrium has been established

The Entry of New Firms in the Long Run

•At this market price P1, most firms in the market make supernormal profits
•We assume that the aim of each firm is to find a profit-maximizing  output
•The entry of firms causes an outward shift of market supply – price falls



Long Run Equilibrium Price and Profit

•In long run equilibrium all firms are making normal profits (P=AC)
•Normal profits where AR=AC – i.e. just enough profits to keep resources in their current use







Последнее изменение: вторник, 14 августа 2018, 10:21