run to long run equilibrium. Initially firms are shown as earning positive economic profits.

Then we show how these profits lead more firms to enter the market and the result is a long

run equilibrium with zero economic profits.

1. The LHS graph depicts a market for technology devices The equilibrium occurs at the intersection

of supply and demand, pointed to by the red arrow where the market price is $5 per unit

and the quantity is 2 billion. 2. The RHS graph depicts a perfectly competitive

firm . 3. Because the firm is perfectly competitive,

it is a price taker, and it faces a demand curve that is horizontal intersecting the

vertical axis at the prevailing market price of $5

4. Its average total cost curve (ATC) is colored green and its marginal cost curve

(MC) is colored red. 5. Its profit maximizing point occurs at the

intersection of the horizontal demand curve and the red MC. Which we will point to with

a black arrow. 6. The firm's profit maximizing output level

is directly below the intersection and is 5 units.

7. Total revenue will be the product of 5 units times $5 or $25.

8. Total cost is the product of Average total cost which is directly above the profit maximizing

output level, and is approximately $3. times the output 5 times, which is $15.

9. Profit then is represented by the rectangle beginning at $5 price down to ATC of $3 and

across to the output of 5 which is an area of of $10. The positive profit attracts other

firms to enter the market. 11. In the LHS graph of the market we represent

this by a rightward shift of the market supply curve.

12. The entry of firms drives the price down to point b.

13. With the new market price of $3, the demand curve facing the perfectly competitive

firm in the RHS graph shifts down to $3 as well.

14. The profit maximizing output becomes 4 units.

15. Total revenue is now $3 times 4, or $12. 16. Total cost is now $3 times 4, or $12 also.

17. Profit is $12 - $12, or zero, and 18. Lets clean up the market graph and show

a representation of the firm and market in long run equilibrium.

19. Of course the long run can be interrupted by for example adverse short run demand shocks,

resulting in negative profits, however ,lets return our equilibrium and leave that discussion

for another lecture!!