Long Term Supply Curve and Economic Profit
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Long Term Supply Curve and Economic Profit

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    Karam A.
    PL
    Karam A.

    here i would like to say we have problem with this model is that it assumes a static economy. Sal correctly points out that the equilibrium price is the price that produces zero economic profit (i.e. only a "normal" profit or just enough to keep the firm from going under). If industry-wide supply or demand changes, then a new price is established that in the short-run generates either economic profits or losses. Economic profits attract new firms into the industry. This increases supply and drives down the price. Losses drive firms out of the industry which reduces supply and brings prices back up. This would suggest that in the long-run the price of the good would never change and we could have an infinite quantity supplied at that price. In other words, we would have a perfectly elastic long-run supply curve. This is not the case though. Increasing demand for the product, drives up demand for all the factors of production that produce that product increasing their price and decreasing demand for the product has the opposite effect driving down the demand for factors of production reducing their price. Complicating things further, the introduction of new technology or changes in the prices of other goods also affect the price of factors of production. In other words, there is no long-run supply curve or at least not the perfectly elastic supply curve that Sal suggests. Much of the confusion here could be eliminated by combining the industry-wide supply and demand illustrated in this video with the firm's costs illustrated in the previous videos.

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