3 Long-Run Entry, Exit, and Equilibrium Free Online FlashCards

What does economic profit include?

Economic profit is total revenue minus all costs, including the opportunity cost of resources supplied by the owners.

Does zero economic profit mean owners earn no return?

Zero economic profit means owners cover explicit costs and earn the normal return available from the next-best use of their resources.

What condition describes a firm's long-run competitive equilibrium?

In the standard competitive long-run equilibrium, a firm produces where $P = MR = MC = \min LRAC$.

What does positive economic profit encourage?

Positive economic profit gives firms an incentive to enter the industry.

How does entry affect industry supply and market price?

Entry increases industry supply, putting downward pressure on market price and reducing the profits of existing firms.

What do economic losses encourage firms to do in the long run?

Economic losses encourage some firms to exit the industry in the long run.

How does exit affect industry supply and market price?

Exit reduces industry supply, putting upward pressure on market price and reducing the losses of firms that remain.

When might a loss-making firm keep producing in the short run?

In the short run, a firm may keep producing while it covers its variable costs, even if it is losing money overall.

What does the long-run industry supply curve trace?

The long-run industry supply curve traces market price and total output across long-run equilibria, after firms can enter, exit, and adjust production.

Why is long-run supply horizontal in a constant-cost industry?

In a constant-cost industry, long-run supply is horizontal because expansion leaves input prices and firms’ production costs approximately unchanged.

Why does long-run supply slope upward in an increasing-cost industry?

In an increasing-cost industry, long-run supply slopes upward because expansion raises input prices or firms’ costs.

Why does long-run supply slope downward in a decreasing-cost industry?

In a decreasing-cost industry, long-run supply slopes downward because expansion lowers costs, for example through industry-wide learning.