ECON 103 Lecture Notes - Lecture 18: Marginal Revenue, Market Power, Takers
18 Aug 2018
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Chapter 9: price takers and the competitive process cont. Economic profit induces both: the entry of new firms, and, expansion in the scale of operation of existing firms. In the long-run, competition drives economic profit to zero. If atc exceeds price, firms will suffer an economic loss. Economic losses induce: the exit of firms from the market, and, a reduction in the scale of operation of the remaining firms. As market supply decreases, price will rise to average total cost. Thus, profits and losses move price toward the zero-profit in long-run equilibrium. Long run - equilibrium will occur when all firms in the industry are making zero economic profit. Short run: fixed factors of production such as plant size limit the ability of firms to expand output quickly. Long run: firms can alter plant size and other fixed factors of production. Therefore, the market supply curve will be more elastic in the long run than in the short run.
