profit maximization in the long run

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PROFIT MAXIMIZATION IN THE LONG RUN

• In the short run, each firm has a fixed, unalterable plant.
  • Firms may shut down in the sense that they can produce zero unit of output but they still stay in the business.
  • The number of firms in the industry is given.

• In the long run, all inputs are variable. Firms can change their plant capacities.
  • The decisions to enter or exit the market depend on the profits or losses that firms can make.
  • The number of firms in the industry can increase or decrease as new firms enter or existing firms leave the market.

LONG RUN DECISION

• In the long run, the firm exits if it incurs loss.
  • TR < TC
  • TR/Q < TC/Q
  • P < ATC

• In the long run, a firm will enter the industry if such an action would be profitable.
  • TR > TC
  • TR/Q > TC/Q
  • P > ATC

THE LONG RUN SUPPLY

• The long run supply curve for a perfectly competitive firm is the portion of its marginal cost curve that lies above average total cost.
• A perfectly competitive firm’s long run supply curve is its marginal cost curve so long as P > ATC.
• long run supply curve graph

LONG RUN EQUILIBRIUM

• Entry eliminates economic profits.
• Exit eliminates losses.
• Long run equilibrium is where:
  • P = long run ATC
  • Firms earn zero economic profits.