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Long-Run Output

long-run profit maximization -  

  • marginal costs change now that firm can adjust more inputs in long run
  • economic profit made as long as marginal cost (equal to price) above the average total cost
  • zero economic profit - firm earning a normal (competitive) return on investment
    • normal return - equal to investing elsewhere (whether in capital or other industry)
  • high profit >> other firms enter market (assuming free entry) >> increases output >> drives down prices >> reduces profit

      long-run competitive equilibrium - when no exit/entry  

  • firms earning zero economic profit >> no incentive to enter or exit
  • all firms must be maximizing profit
  • quantity supplied by industry equal to quantity demanded by consumers
  • patents act as opportunity cost for firms that have it
    • can be sold or kept to produce a positive profit

economic rent - willingness of firms to pay for an input less than the minimum amount  

  • some firms have natural advantages over others
    • land might be beneficial to shipping
    • materials might be more readily accessible
  • gives firm an edge >> other firms willing to pay for that edge >> economic rent

long-run supply curve - cannot just sum curves like w/ short-run  

  • in long-run, markets and enter/exit, so no way to tell how many total firms are in the market
  • constant-cost industry - horizontal long-run supply curve, very elastic
  • unlike short-run, where 1 input held constant, both inputs can vary in the long-run
    • use MRTS to relate wages/rent to marginal labor/capital functions (in terms of Q)
    • C(Q) = wL(Q) + rK(Q)
  • curve generally wider than short-run curve
    • MC-MR intersection located farther to the right
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