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LEARNING OBJECTIVES
- Distinguish between economic profit and accounting profit.
- Explain why in long-run equilibrium in a perfectly competitive industry firms will earn zero economic profit.
- Describe the three possible effects on the costs of the factors of production that expansion or contraction of a perfectly competitive industry may have and illustrate the resulting long-run industry supply curve in each case.
- Explain why under perfection competition output prices will change by less than the change in production cost in the short run, but by the full amount of the change in production cost in the long run.
- 5. Explain the effect of a change in fixed cost on price and output in the short run and in the long run under perfect competition.
In the long run, a firm is free to adjust all of its inputs. New firms can enter any market; existing firms can leave their markets. We shall see in this section that the model of perfect competition predicts that, at a long-run equilibrium, production takes place at the lowest possible cost per unit and that all economic profits and losses are eliminated.
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