ECON 2005 Lecture Notes - Lecture 17: Economic Equilibrium, Perfect Competition, Marginal Cost
Document Summary
In the short run, perfectly competitive firms can earn positive profits or negative profits. In the long run this is not possible, all pc firms must earn zero profit. In other words, in the long run, the price will be pushed down to the minimum average cost: this is the point where mc = ac = p. In the long run, equilibrium price is equal to long-run average cost (which is the minimum of short-run average cost), short-run marginal cost, and short-run average cost. Profits are driven to zero: p* = srmc = srac = lrac. In efficient markets, investment capital flows toward profit opportunities. If firms in an industry earn negative profits in the short run, then in the long run firms will exit this industry: such exit will shift the supply curve back thus forcing prices up. Firms will keep exiting until the remaining firms get profits = 0.
