Long run adjustments? If firms are price takers but there are barriers to entry, profits will persist If the industry is perfectly competitive firms are not only price takers but there is free entry Other greedy capitalists, enter the market Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Long Run Adjustments? • If firms are price takers but there are barriers to entry, profits will persist • If the industry is perfectly competitive, firms are not only price takers but there is free entry Other “greedy capitalists” enter the market
Effect of entry on Price? Ent Market Firm Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Effect of Entry on Price? Firm Qf $ Df Market QM $ D S P e S* P e* Df* Entry
Effect of Entry on the Firms Output and Profits? MC AC Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Effect of Entry on the Firm’s Output and Profits? $ Q AC MC QL P e Df P e* Df* Qf*
Summary of logic Short run profits leads to entry Entry increases market supply, drives down the market price, increases the market quantity Demand for individual firms product shifts down Firm reduces output to maximize profit Long run profits are zero Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Summary of Logic • Short run profits leads to entry • Entry increases market supply, drives down the market price, increases the market quantity • Demand for individual firm’s product shifts down • Firm reduces output to maximize profit • Long run profits are zero