How does short-run profit induce entry and change long-run equilibrium?
Entry expands industry supply until economic profit is zero at P=min LAC in a constant-cost industry.
Follow the cause and effect
Find minimum LAC and output per firm.
Use market demand at the long-run price to find Q.
Divide Q by q to find firm count and explain entry or exit.
The model you are using
Conditions for this model
Identical firms, fixed technology and input prices, free entry and exit, and an integer equilibrium firm count.
The exam trap
Zero accounting profit differs from zero economic profit because normal return is an economic cost.
Connect the reasoning to the graph
What changes
- Industry supply shifts with firm count while the firm returns to P=min LAC.
What stays fixed
Identical firms, fixed technology and input prices, free entry and exit, and an integer equilibrium firm count.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
Divide Q by q to find firm count and explain entry or exit.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Explain a demand increase in a constant-cost industry using market and firm graphs.