LongRun Market Equilibrium

1
Long-Run Market Equilibrium
Below are the market supply and market demand
curves for jeans. Also, given are the cost curves
for Nap Jeans, one of the 100 firms in the
market. Suppose the market is in equilibrium
(point E), Market price is 50 per jean At that
price Nap produces Q 58 jeans, where MR MC
(point e) Nap Jeans average total cost (ATC) at
that quantity is 35. Thus, profit (P ATC)Q
(50 35)58 870/day (shaded rectangle)
Since the market price is above the break-even
price, all the firms will be earning a positive
profit. This will provide incentives for other
firms to enter the market. Since there are no
barriers to entry, more firms will enter,
shifting the market supply curve to the right (S2
). The new equilibrium is at point D, and the
market price falls to 40. Nap now produces Q
50 jeans, where the new MR MC. (point d) At
that quantity, ATC 32. So profit (P ATC) Q
(40 32) 50 400/day
While profits are lower, they are still positive.
Thus, there will still be incentives for more
firms to enter the market. Firms will continue to
enter the market until economic profit is equal
to zero. The market supply curves increases again
(S3). The new equilibrium is at point C, and the
market price falls to 30. Nap now produces Q
40 jeans, where the new MR MC. (point c) At
that quantity, ATC 30. So profit (P ATC) Q
(30 30) 40 0/day (Break-even
point) Point C is the long-run equilibrium in the
market. There will no incentive for firms to
entry or exit the market.
Price
Market for Jeans
Nap Jeans (typical firm)
/jean
S1
MC
S2
profit
e
S3
E
MR1 P1
d
MR2 P2
D
ATC
35
32
Long-run market equilibrium
c
MR3 P3
C
D
58
Quantity of Jeans/day
Quantity of Jeans/day