Chapter 9: Firms in Competitive Markets: The Long Run

The Firms Short-Run Decision to Shut Down

The firm considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down.

Firms Long-Run Decision to Enter a Market

A firm will enter the industry if such an action would be profitable. -Enter if TR>TC -Enter if TR/Q>TC/Q -Enter if P>ATC

Increase in Demand in the Short Run

An increase in demand raises price and quantity in the short run. Firms earn profits because price now exceeds average total cost.

Sunk Costs

Are costs that have already been committed and cannot be recovered.

The Long Run: Market Supply with Entry and Exit

Firms will enter or exit the market until profit is driven to zero. In the long run, price equals the minimum of average total cost. The long run market supply curve is horizontal at this price. At the end of the process of entry and exit, firms that remain must be making zero economic profit. The process of entry and exit ends only when price and average total cost are driven to equality. Long run equilibrium must have firms operating at their efficient scale.

The Shot Run: Market Supply with a Fixed Number of Firms

For any given price, each firm supplies a quantity of output so that its marginal cost equals price. The market supply curve reflects the individual firms marginal cost curves

Long-Run Supply Curve

The competitive firm's long run supple curve is the portion of its marginal-cost curve that lies above average total cost.

Firms Long-Run Decision to Exit a Market

In the long-run, the firm exits if the revenue it would get from producing is less than its total cost. -Exit if TR<TC -Exit if TR/Q<TC/Q -Exit if P<ATC

Marginal Firm

Is the firm that would exit the market if the price were any lower.

Supply in a Competitive Market

Market supply equals the sum of the quantities supplied by the individual firms in the market

Firms Stay in Business with Zero Profit

Profit equals total revenue minus total cost. Total cost includes all the opportunity costs of the firm. In the zero profit equilibrium, the firms revenue compensates the owners for the time and money they expend to keep the business going.

Exit

Refers to a long-run decision to leave the market

Shutdown

Refers to a short-run decision not to produce anything during a specific period of time because of current market conditions

Why the Long-Run Supply Curve might slope upward?

Some resources used in production may be available only unlimited quantities. Firms may have different costs.

Firms Shut Down

The firm shuts down if the revenue it gets from producing is less than the variable cost of production. -Shut down if TR<VC -Shut down if TR/Q<VC/Q -Shut down if P<AVC

Short-Run Supply Curve

The portion of the marginal-cost curve that lies above average variable cost is the competitive firms short-run supple curve.