If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:5:58
PRD‑3.A.8 (EK)
PRD‑3.A.9 (EK)

Video transcript

what we have here we can view as the long-run equilibrium or long-run the steady-state for a perfectly competitive market let's say this is the market for apples and it was this idealized perfectly competitive situation where you have many firms producing their 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 the price that the firm's 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 in 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 going to 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 this the apples that this market produces that it's incredibly good for you like 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 be 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 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 of the quantity this whole area is going to be the economic profit that this firm is getting and it's likely that all of the firm's were most of the firm's in this perfectly competitive market are going to be getting it because they all have the same cost structure but as we've 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 talked about a situation where as firms enter into a market or exited market it doesn't change the cost structures of the individual firms but 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 what these firms do start to go up in cost 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 pay more for a land on which to grow them and so you would have a different marginal cost curve maybe 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 maybe it looks something like this so average total cost prime and so you could 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 will only do so until the economic profit for all the firms goes to zero so what point will the economic profit go to zero well that's when the marginal revenue for the firm's 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 to the market up until the point that the equilibrium price gets us to P Prime and so the supply would increase those folks want to get that economic profit but it would increase until this point so it shift a little bit to the right and 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 an 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 the 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 of 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 don't 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 could 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 entrance into the market this cost structure goes down and so the supply can increase more and more and more and more to point that the equilibrium price is now lower than it was before and then you would have a downward sloping long-run supply curve
AP® is a registered trademark of the College Board, which has not reviewed this resource.