Production- Perfeet Cornpetition Free Entry However, a firm making a loss in the short run will shut down in the long run(and make zero profits). Alternatively. if a firm is making positive profits, other firms will enter the market in the long run. The free entry assumption allows firms to enter when they see such profitable opportunities S The graph shows the case when a firm is making a loss. That firm (and possibly others)will leave the market in the long run, decreasing supply from S to S. Market price rises to p from p. A similar graph could be drawn for firms entering the market. Price would fall. letion-Perfeer Competition Perfect Competition in the Long Run Firms making a loss continue to leave causing price to rise until the remaining firms are making no profits at all. In the case when firms are making a profit, new firms continue to enter, forcing market price down until all the profits. The competitive firm in the long run makes zero profits. This is illustrated below MC AC Notice that(AR=)p=MC= AC in equilibrium. This implies all kinds of efficiency, returned to next lecture.Production — Perfect Competition 9 Free Entry • However, a firm making a loss in the short run will shut down in the long run (and make zero profits). • Alternatively, if a firm is making positive profits, other firms will enter the market in the long run. • The free entry assumption allows firms to enter when they see such profitable opportunities. ................................................................................................................................................................................................................................................................................ . . . ....................................................................... ............... ..................... 0 p y D S S 0 p 0 y 0 p y . . . . . ............. ............. ............. ............. ............. ............. ............. . . . . . . . ............. ............. ............. ............. ......... • The graph shows the case when a firm is making a loss. That firm (and possibly others) will leave the market in the long run, decreasing supply from S to S 0 . Market price rises to p 0 from p. • A similar graph could be drawn for firms entering the market. Price would fall. Production — Perfect Competition 10 Perfect Competition in the Long Run • Firms making a loss continue to leave causing price to rise until the remaining firms are making no profits at all. • In the case when firms are making a profit, new firms continue to enter, forcing market price down until all the firms receive zero profits. The competitive firm in the long run makes zero profits. This is illustrated below. .................. . . .... ............................. ................................................................................................................................................................................................................................................................................ ..................................................................................................................................................................................................................................................... . . . 0 p y MC AC p ∗ y ∗ • Notice that (AR =)p ∗ = MC = AC in equilibrium. This implies all kinds of efficiency, returned to next lecture