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  • In this video clip we depict a perfectly competitive market and show the adjustment from short

  • run to long run equilibrium. Initially firms are shown as earning positive economic profits.

  • Then we show how these profits lead more firms to enter the market and the result is a long

  • run equilibrium with zero economic profits.

  • 1. The LHS graph depicts a market for technology devices The equilibrium occurs at the intersection

  • of supply and demand, pointed to by the red arrow where the market price is $5 per unit

  • and the quantity is 2 billion. 2. The RHS graph depicts a perfectly competitive

  • firm . 3. Because the firm is perfectly competitive,

  • it is a price taker, and it faces a demand curve that is horizontal intersecting the

  • vertical axis at the prevailing market price of $5

  • 4. Its average total cost curve (ATC) is colored green and its marginal cost curve

  • (MC) is colored red. 5. Its profit maximizing point occurs at the

  • intersection of the horizontal demand curve and the red MC. Which we will point to with

  • a black arrow. 6. The firm's profit maximizing output level

  • is directly below the intersection and is 5 units.

  • 7. Total revenue will be the product of 5 units times $5 or $25.

  • 8. Total cost is the product of Average total cost which is directly above the profit maximizing

  • output level, and is approximately $3. times the output 5 times, which is $15.

  • 9. Profit then is represented by the rectangle beginning at $5 price down to ATC of $3 and

  • across to the output of 5 which is an area of of $10. The positive profit attracts other

  • firms to enter the market. 11. In the LHS graph of the market we represent

  • this by a rightward shift of the market supply curve.

  • 12. The entry of firms drives the price down to point b.

  • 13. With the new market price of $3, the demand curve facing the perfectly competitive

  • firm in the RHS graph shifts down to $3 as well.

  • 14. The profit maximizing output becomes 4 units.

  • 15. Total revenue is now $3 times 4, or $12. 16. Total cost is now $3 times 4, or $12 also.

  • 17. Profit is $12 - $12, or zero, and 18. Lets clean up the market graph and show

  • a representation of the firm and market in long run equilibrium.

  • 19. Of course the long run can be interrupted by for example adverse short run demand shocks,

  • resulting in negative profits, however ,lets return our equilibrium and leave that discussion

  • for another lecture!!

In this video clip we depict a perfectly competitive market and show the adjustment from short

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