In this chapter, we turn from the short run to the long run. Remember that output (supply) decisions are less constrained in the long run because the firm has no fixed factor of production and firms are free to enter and exit industries.
We will discuss the possibility that the profit-maximizing point of production for the firm may still lead to the firm losing money. We will find out when it becomes necessary for a firm to shut down. We will also find the long-run competitive equilibrium, which is the condition of a perfectly competitive market in the long run. Finally, we will examine the phenomenon of scale economies. By the end of this chapter, you should be able to answer the following questions:
1. How do you find the profit for a firm that is following the MC = MR rule?
2. What is the difference between maximizing profits and minimizing losses?
3. When should a firm shut down?
4. How does the shutdown rule change as the firm moves to the long run?
5. How is the industry supply curve of a perfectly competitive industry constructed?
6. Why do perfectly competitive firms not make any profit in the long run?
7. Why is zero economic profit not such a bad thing?
8. Why are the average total cost (or SRAC) and long-run average cost curves the same shape, but for different reasons?
9. How do firms, in the long run, end up producing with a technology of the optimal scale?