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“What we have here we can view as the long run equilibrium or long run run steady state for a perfectly competitive market. Let s say. This is the market apples and this is idealized perfectly competitive situation. Where you have many firms producing.
They re non differentiated. They have the same cost structure. There s no barriers to entry or exit. And on the left.
You can see that this equilibrium price. Which is set by the intersection of the supply and demand curves that that s just going to be the price that the firms have to take and we ve talked about that at length in other videos that s going to define that the firm s marginal revenue. Not just this firm but all of the participants of the market in other videos. We ve talked about the fact that the rational quantity for this firm to produce would be where marginal revenue intersects marginal cost.
And it s also gonna be the point. Where you have zero economic profit. Where at that quantity. Let s say the quantity for the firm your average total cost is equal to your marginal revenue.
If marginal revenue were higher than average total cost at this quantity. Well. Then you would have other entrants into the market. Because you re having positive economic profit.
If marginal revenue is below average total cost at that quantity well then firms are running economic losses. And you will have people exiting. The industry and either of those situations would get us back to an equilibrium state that looks something like this but now let s imagine a shock to the market somehow. Let s say.
A new research study comes out that says that the apples that this market produces that it s incredibly good for you it ll make you live longer it ll make you happier it ll make you have more friends well. Then the demand for apples goes up. And so you have a new demand curve that looks something like this d prime well in that situation. What s going to happen.
Well. Now. You have a new equilibrium. Price.
You also have a new equilibrium. Quantity over. Here. Let s call that p.
Prime. This is going to define a new marginal revenue curve for the participants in the industry. So m. Marginal revenue.
Prime and now all of a sudden. The rational quantity for them to produce would be out here at least for this firm to produce so q. Prime for this firm is out here. And you notice at that quantity.
It is making economic profit for every unit. It gets that much it costs that much on average for every unit. So it s making that much per unit and then you multiply that times the number of units or the quantity. This whole area is going to be the economic profit that this firm is getting and it s like that all of the firms or most of the firms in this perfectly competitive market are going to be getting it cause.
They all have the same cost structure. But as we said before when you have this positive economic profit. And there s no barriers to entry in the long run more firms will enter because there s economic profit to be had and in previous videos. We ve talked about a situation where as firms enter into a market or exit.
A market. It doesn t change the cost structures of the individual firms. So let s imagine for a second that because of everyone entering into this market that seems to have economic profit for the firms. That are participating into it some of the inputs of say growing apples.
Which is is what these firms do start to go up in costs. So we re not talking about constant costs perfectly competitive market now. We re not talking about an increasing cost perfectly competitive market. Well.
Then firm. A and every firm s cost structure is going to change because as more firms come in you re going to have to pay more for maybe apple seeds pay more for maybe pesticides or wax or maybe you pay more for land on which to grow them. And so you would have a different marginal cost curve. We have the marginal cost curve.
Now looks like this so marginal cost curve. Prime. You would also have a new average total cost curve. Maybe it looks something like this so average total cost prime.
And so you can imagine that firms will jump into the market in order to capture or think that they might be able to get some economic profit. But they would only do so until the economic profit for all firms goes to zero. So what point will the economic profit go to zero well that s when the marginal revenue for the firms is equal to our marginal cost is equal to our average total cost. So it s that point right over there.
So we would get to this point right over. Here. Let s call that marginal revenue prime and so more and more firms would enter into the market up until the point that the equilibrium price gets us to p. Prime.
And so the supply would increase those folks wanna get that economic profit. But it would increase until this point so it d shift a little bit to the right and then we would get to s prime as you can see based on this we can now start to imagine a long run supply curve in this increasing cost perfectly competitive market. We were over here that was our equilibrium point before now we are over here and so our long run supply curve in this increasing cost environment. Even though.
It s perfectly competitive might look something like this so. In a constant cost world. This was a flat line now in an increasing cost world as more and more people enter the market. The cost structure.
The inputs into producing an apple go up. Now long run supply is that remember the long run is enough time to go by for people to enter and exit. The market or enough time to go by so fixed costs aren t fixed. Anymore that they can be shed or that they could be increased.
Now you could do another thought exercise. Let s say we re dealing with a market where the more people that enter the market. The inputs actually get cheaper and if that seems hard to believe you can imagine well. Now people are able to produce seeds or wax at a new scale.
So the inputs actually get cheaper well then you would see the opposite thing then you would see that as more entrants enter the market this cost structure goes down. And so the supply can increase more and more and more and more to a point that the equilibrium price is now lower than it was before and then you would have a downward sloping long run supply curve. ” ..
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