2.6 — Long Run Industry Equilibrium — Class Content
Overview
We wrap up Unit 2 on Producers this week by bringing our optimization model of how firms maximize profits into the long run, when firms can enter or exit depending on profitability. We also now need to talk about the fact that our firm is not the only profit-maximizing firm in the market, so we derive an equilibrium model of the industry in the long run.
Famously, we see that in competitive industries, economic profits get driven to zero in the long run, as firms enter or exit any time there are profits or losses.
We also talk about the hard to understand, but extremely important, idea of economic rents.
Next class we will have a review session for Exam 2.
Update: I have added the answers to the price elasticity of supply question in the slides (that I had to skip for time):
Readings
- Ch. 8.4-8.5 in Goolsbee, Levitt, and Syverson, 2019
Practice
Answers from last class’ practice problems are posted on that page.
Appendix
See the online appendix for today’s content:
Assignments
Problem Set 4 Due Friday October 21
Problem Set 4 (on classes 2.4-2.7) is due by 11:59 PM Friday October 21 on Blackboard Assignments.
Slides
Below, you can find the slides in two formats. Clicking the image will bring you to the html version of the slides in a new tab. The lower button will allow you to download a PDF version of the slides.
I suggest printing the slides beforehand and using them to take additional notes in class (not everything is in the slides)!