- [Man] Alright, now
let's dig a little bit
more into analyzing perfectly
competitive markets,
and in particular we're
gonna focus on the long run,
and remember the long run
is the time span where
firms can enter and exit the market.
Or, another way to think about it is,
in the long run, fixed costs
actually become variable,
you can shutter factories,
or you can build factories,
in the long run.
Now, in previous videos, we talked about
that in the long run, in a
perfectly competitive market,
the firms that operate in that
perfective competitive market
are going to be operating
at zero economic profit,
and you can see that
example right over here.
As we've talked about
it in many, many videos,
in a perfectly competitive market,
the firms are price takers,
that price is set by that
equilibrium point between
the supply and demand curves,
and the firms just take that.
And so, their marginal revenue curve,
it would just be a horizontal line
that you see right over there,
and zero economic profit
happens when you produce
a quantity where your average total cost
is the same as your marginal revenue.
For each unit, the amount that you get,
which is that marginal unit,
that's also how much it
costs you to produce it,
now remember, when we're
talking about economic profit,
that includes your opportunity costs,
so, that doesn't mean that these firms
are operating at zero accounting profit,
they could still be making money,
but, if you were to factor
in their opportunity costs,
that's when you get things to zero.
Now, what I want to think about,
what happens in the short and long run,
if something say happens to market demand.
Let's say that this is
the market for apples,
the fruit apples.
So, this is the market for
apples we're talking about,
this is the market as a whole,
this is a firm that produces apples,
it could be a farm of some kind.
And let's say that a new study comes out
that apples actually are
super good for your health,
and they can be used as a
performance enhancer for sports,
and all sorts of positive results.
Well, what is likely to
happen in the short run,
and this is a little bit of a review
in terms of our supply and demand curves,
and also what would happen
to Firm A's economic profits.
Pause this video and think about that.
Well, in the short run,
your demand curve would
shift to the right,
and so, because at a given price,
people are willing to demand more apples
because it has all these
new and exciting benefits.
And so, the demand curve might
shift someplace like that,
so, that is D Prime,
and if the demand curve shifts like that,
now we have a new equilibrium
price in the market,
our new equilibrium price in the market
is right over here, we also
have a new equilibrium quantity,
so, our quantity is shifted
from there, to now there,
so, a new equilibrium quantity,
and we have a new equilibrium price,
let's just call this P Prime.
And, at that new equilibrium price,
well now, we have a
higher marginal revenue
curve for Firm A,
and now, Firm A, it'd be
rational for them to produce,
remember, it's rational for
them to produce up until
the marginal revenue is
equal to marginal cost,
because each of those incremental
units up to that point,
they're going to be making money
on those incremental units,
and so, now it's rational for them
to produce at this quantity,
let me call that,
Q Prime,
and at this level,
now all of a sudden Firm A
is making economic profit,
because at this quantity,
that's revenue per unit,
this is average total cost per unit,
so they're making this height per unit,
and then you multiply it, times
your total number of units,
which is the base of this rectangle,
and so, this area would represent
this positive economic profit.
Now, you might be saying,
wait, hold on a second,
I thought you said in the long run,
firms don't make economic profit
in a perfectly competitive market.
And that is true,
at least based on the models
that we are constructing,
because what happens when you have
this positive economic profit?
Well, other firms will enter this market,
remember, we're talking about
a perfectly competitive market,
there are no barriers to enter in,
everyone is fairly non-differentiated,
and they have similar cost structures.
And so, what you could imagine is,
in the long run, folks
will enter the market,
and then, the supply curve
will also shift to the right,
and assuming that that doesn't change
the cost structure for
the individual firms,
and actually, let me show someone
entering into this market,
so now, Firm B is entering this market,
and when Firm B enters the market,
it has the same cost structure as Firm A,
and it didn't shift either of their first,
either of their cost structures,
so, this is known as a
constant cost, perfectly
competitive market,
where the entering or the
exiting of firms does not
affect the cost structures of
the firms that are entering,
or that are in the market.
And so, this situation,
these graphs look the same,
but now we have more
firms entering the market,
the supply curve will shift to the right,
and it's going to keep
shifting to the right
until these firms that all
have identical cost structures,
are no longer making
economic profit again.
It wouldn't shift further
to the right because
no one's going to enter if
they're making economic loss,
it'll keep shifting until no one
is making that economic profit.
And so, you see what happened
in this constant cost,
perfectly competitive market,
that now, we are back to
this equilibrium point
where we are at a higher
quantity because people like all
the benefits of these apples,
but we're at the price we were before,
which is the same marginal
revenue curve that we were before
for the various players
in this market.
And so, when you see
something like this in
a constant cost, perfectly
competitive market,
you can actually create
a long run supply curve,
you could view this S and S Prime as
a short run supply curve,
the long run supply
curve, on the other hand,
for a perfectly competitive market,
in which the cost structure
of the participating firms
do not depend on the number of firms
that are in or out of the market,
then you're at long run supply curve
in what we could call
a constant cost, perfectly
competitive market,
is going to be a
horizontal line like this.
So, I will leave you there.
In other videos, we'll think about,
well, what happens if the
cost structure changes
for these firms depending on
how many firms are in
or out of the market,
and that will be based on,
how do the costs of the inputs
into their production change
as you have people entering
or exiting that market.
