1. LONG RUN
A period of time over which the number of firms in an industry can change their production facilities. In the long run, firms can enter or leave an industry, and existing firms can modify their facilities or build new facilities.
The time required for a firm to build a production facility and start producing output.
The long run varies across industries.

2. LONG-RUN SUPPLY CURVE
Shows the relationship between price and quantity supplied over a period of time long enough that firms can enter or leave the market and firms can modify their production facilities.

3. Chair Industry Output and Average Production Cost
Number Industry Chairs Total Average of firms Output per Cost for Cost Per Firm Firm Chair
$ $20
50 1, $ $24
75 1, $ $28
The average cost of chair industry increases as the industry grows for two reasons:

4. Reasons Average Cost Grows As Industry Grows
Increasing Input Prices
As an industry grows, it competes with other industries for limited amounts of various inputs; this competition drives up the prices of these inputs.
Less Productive Inputs
A small industry only uses the most productive inputs, but as the industry grows, firms may be forced to use less productive inputs.

5. Drawing the long-run supply curve
Market
Initial
Short-Run
Supply
Firm
Price
SMC
MR2
9.00
9.00
New
Short-Run
Supply
SATC2
Profit
SATC1
6.00
6.00
MR3
MR1
5.00
5.00
New
Demand
Long-Run
Supply
Initial
Demand 10 14 22 10 11 14
Quantity (thousands)
Quantity

6. The Long-Run Market Supply Curve
How much output produced at each price.
Determine the total output of the industry by multiplying the output per firm by the number of firms in the industry.

7. Determining Number of Firms in an Industry
Whenever opportunity to make profit - price exceeds average cost - firms enter market.
Firms continue to enter until economic profit is zero.
To find number of firms in the market, find the quantity of chairs at which average cost equals market price.

8. The Long-Run Market Supply Curve28 i
Price of
Chairs $ 24 h 20 e
500
1,000
1,500
Chairs Per Hour

9. The Long-Run Supply Curve
The preceding long-run supply curve:
Is positively sloped.
The higher the price of chairs, the larger the quantity supplied.
An increase in the price of chairs makes chair production more profitable, so
firms enter the market,
increasing the total output of the industry.

10. Increasing-Cost Industry
An industry with a positively-sloped long-run supply curve.
Indicates average cost of production increases as industry grows.
Supply curve will be relatively steep if average cost increases rapidly as industry grows.
With rapidly increasing average cost, a relatively large increase in price is needed to get firms to produce more output.

11. The Long-Run Market Supply Curve For a Constant-Cost Industry
Price of
Taxi
Service $
per mile
TAXI
TAXI
TAXI 3
Long-Run Supply Curve
1,000
2,000
Miles of Taxi Service Per Hour

12. Constant-Cost Industries
An industry with a horizontal long-run supply curve.
Indicates average cost of production is constant.
It can continue to buy inputs at the same prices, and these inputs are as productive as inputs in the smaller industry.
Industry must be small part of relative input markets: industry does not affect the prices of inputs.

13. Decreasing-Cost Industry
An industry with a negatively-sloped long-run supply curve.
The average cost of production decreases as the industry expands.

14. Short-Run versus Long-Run Supply Curves
Long-run response to change in price is much greater than short-run response.
The long-run supply curve is much flatter than the short run curve, meaning that the quantity of chairs increases by a larger amount in the long run.
The short-run supply curve is much steeper than the long-run supply curve because there are diminishing returns in the short run.

15. Long-Run versus Short-Run Market Supply Curve
Short-Run Supply Curve j
Price of
Chairs $ 28 i h 24
PRICE $24 $28
SHORT RUN
# of Firms
Chairs by 1 firm
Chairs by all firms 1,000 1,100
LONG RUN
# of Firms
Chairs by 1 firm
Chairs by all firms 1,000 1,500
1,000
1,100
1,500
Chairs Per Hour

16. Long-Run versus Short-Run Market Supply Curve
Price elasticity of supply measures difference between short-run and long-run responses to change in price:
Change in price = 16.67% = 4/24
Short-run change in quantity = 10% = 100/1000
Short-run price elasticity of supply = 0.60
Long-run change in quantity = 50% = 500/1000
Long-run price elasticity of supply = 3.00

17. Effects of Increased Demand
Increased demand results in rightward shift in demand curve, causing a shortage at the original price: quantity demand exceeds quantity supplied at the original price.
In Short Run
• The number of firms is fixed,
• Supply curve is relatively steep,
• Price increases by large amount,
In Long Run
• Firms can enter market,
• Supply curve is relatively flat,
• Price increases by small amount .

18. Short-Run and Long-Run Effects of an Increased Demand for Video Rentals
Price of
Video Rentals
$ Per Night
Short-Run
Supply
6.00 s
New
Demand
Initial
Demand
Long-Run Supply f
2.15
Price Quantity
2.00 i $
Short Run
Change $
Long Run
Change $ 10 14 22
Quantity: Thousands of Video Rentals per Day

19. Relationship between long-run and short-run cost curves
SATC1
SATC3
SATC2
SMC1
Long-run
average
cost (LAC)
Dollars per unit 11 10
100
150
300
Units of output

20. Relationship between LAC and LMC
Long-run marginal cost is the change in total cost resulting from producing an extra unit of output in the long-run.
When LAC is downward-sloping, LMC must lie below LAC.
When LAC is horizontal, LMC and LAC are equal.

21. Relationship between long-run and short-run cost curves
average
cost (LAC)
Dollars per unit 10
Long-run
marginal
cost (LMC)
100
150
300
Units of output

22. An industry served by a single firm.
MONOPOLY
An industry served by a single firm.
Occurs when some barrier to entry exists, preventing other firms from entering the market.
PATENT --
Granted by the government, giving an inventor exclusive right to sell a new product for some period of time.
Government implicitly grants monopoly power.
For example, government permits major league baseball to restrict the number and location of teams.

23. BARRIERS TO ENTRY FRANCHISE or LICENSING SCHEME --
Government designates single firm to sell a particular good:
• Off-street parking;
• National Park Food Concessions;
• Radio and TV FCC licensing.
NATURAL MONOPOLY --
Economies of Scale
Single firm would be profitable; a pair of firms would lose money;
Second firm would make price less than average cost.

24. THE MONOPOLIST’S OUTPUT DECISION
How much output to produce at what price.
Objective is to maximize profits:
The difference between total revenue and total cost.

25. TOTAL AND MARGINAL REVENUE
Total Revenue ---
Price times the quantity sold.
Marginal Revenue ---
The change in total revenue that results from selling one more unit of output.

26. PRICE QUANTITY TOTAL MARGINAL SOLD REVENUE REVENUE $16 0 0 --- $
---
$ $14
$14
$ $24
$10
$ $30 $6
$ $32 $2
$ $30
-$2
$ $24
-$6
QUANTITY SOLD
QUANTITY SOLD
PRICE $$ 14 12 10 8
DEMAND 6 4 2
QUANTITY SOLD -2 1 2 3 4 5 6 -4 -6
MARGINAL REVENUE

27. DEMAND, TOTAL REVENUE AND MARGINAL REVENUE
PRICE QUANTITY SOLD TOTAL REVENUE MARGINAL REVENUE $
---
$ $14
$14
$ $24
$10
$ $30 $6
$ $32 $2
$ $30
-$2
$ $ $6

28. PRICE $$ b 14 c 12
MONOPOLIST’S DEMAND
( MARKET DEMAND ) d 10 h e 8 f 6 i g 4 2
MARGINAL REVENUE
QUANTITY SOLD 1 2 3 4 5 6
- 2 j
- 4
- 6 k

29. THE MARGINAL PRINCIPLE
Increase the level of an activity if its marginal benefit exceeds its marginal cost, but reduce the level if the marginal cost exceeds the marginal benefit. If possible, pick the level at which the marginal benefit equals the marginal cost.
MARGINAL REVENUE = MARGINAL COST

30. USING MARGINAL PRINCIPLE TO PICK PRICE AND QUANTITY
PRICE QUANTITY MARGINAL MARGINAL SOLD REVENUE COST
$ $12 $6
$ $10 $6
$ $8 $6
$ $6 $6
$14 1, $4 $6
$13 1,100 $2 $6
$12 1, $0 $6

31. USING MARGINAL PRINCIPLE TO PICK PRICE AND QUANTITY$$ 24 22 20 h 18 m 16 14 i 12
LONG-RUN MARGINAL COST
EQUALS
LONG-RUN AVERAGE COST 10
PROFIT = $8,100 8 n 6 4
MARKET DEMAND CURVE 2
MARGINAL REVENUE
200
400
600
800
1000
1200
1400
1600
1800
2000
DOSES OF DRUG PER HOUR

32. CALCULATING MARGINAL REVENUE
= Current Total Revenue Previous Total Revenue
= Initial Price - [ Initial Quantity * Slope of Demand Curve ]

33. Long-run average cost and
MONOPOLY VERSUS
PERFECT COMPETITION
PRICE
Market Demand
Curve C m
$15 M D
Long-run average cost and
market supply curve p $6
900
1,800
Doses of Drug per hour

34. DEADWEIGHT LOSS Net loss associated with a monopoly (D).
Monopoly is inefficient because it generates less output than a perfectly competitive market.