Choosing Output in Long Run

* In long run, a firm can change all its inputs, including size of the plant.

* We are taking free entry and free exit.

* Accounting Profit and Economic Profit

- Accounting profit (π) = R - wL

- Economic profit (π) = R - wL - rK

• wL = labor cost
• rk = opportunity cost of capital

* Long Run Competitive Equilibrium

- Zero-Profit

• If R > wL + rk, the economic profits are positive
• If R = wL + rk, zero economic profits, but firms is earning normal rate of return; showing that the industry is competitive
• If R < wl + rk, consider going out of the business

- Entry and Exit

• The long run response to short run profits is to increase profits and output.

• Profits will attract the other producers.
• More producers increase the supply of industry that lowers market price.

Long Run Competitive Equilibrium

* Long Run Competitive Equilibrium

 1)  MC = MR 

 2) P = LAC

• No incentive to enter or leave
• Profit = 0

  3) Equilibrium Market Price

* Questions

 1) Explain market adjustment when P < LAC and firms are having identical costs.

 2) Explain market adjustment when firms are having different costs.

 3) What is opportunity cost of land?