Chapter 8.7: Choosing Output in the Long Run

Economies of scale

arise when a firm can double its output for less than twice the cost.

LMC = P

The long-run output of a profit-maximizing competitive firm is the point at which __.

Accounting profit

measured by the difference between the firm’s revenues and its cash flows for labor, raw materials, and interest plus depreciation expenses.

Economic Profit

takes into account opportunity costs.

Zero economic profit

the firm is earning a normal—i.e., competitive—return on that investment.

negative

A firm earning a ___ economic profit, however, should consider going out of business if it does not expect to improve its financial picture.

competitive

Zero economic profit signifies that an industry is ___.

Entry into the market

A positive profit means an unusually high return on a financial investment, which can be earned by entering a profitable industry.

leave

The firm will ___ the industry when it cannot cover all of its costs; when P < AVC.

Long-run competitive equilibrium

• All firms in the industry are maximizing profit.

• No firm has an incentive either to enter or exit the industry because all firms are earning zero economic profit.

• The price of the product is such that the quantity supplied by the industry is equal to the quantity demanded by consumers.

Economic Rent

what firms are willing to pay for an input less the minimum amount necessary to buy it.