- [Instructor] What we
have here we can view
as the long run equilibrium
or long run steady state
for a perfectly competitive market.
Let's say this is the market for 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.
