Long term supply curve and economic profit발음듣기
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Long term supply curve and economic profit
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We have now thought a lot about the orange juice market and least firm specific level we see in the last week videos we talked about.발음듣기
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what are average total cost and average bearable cost and marginal cost. or if we are running orange juice making business.발음듣기
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So we are gonna go back to some of what we thought about in the past in terms of supply and demand curves.발음듣기
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So this is orange juice market and lets just draw some supply and demand curve right over here.발음듣기
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This right over here is 50 cents. And this is 0.and let's say that this is the quantity in gallons per week.발음듣기
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And we are going to talk about the entire orange juice market so this is going to be millions of gallons per week.발음듣기
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and that is let's say this is 1,2,3,4,5 and 6. and let's just say and I am gonna simplified relative to what we saw in the last video.발음듣기
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Let's just say that the supply curve for the orange juice market careful this time this is the near term supply curve or the short term supply curve looks like looks something like this.발음듣기
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So get to make them produce even that first gallon and looks like we need about 20 cents for that first gallon and then each incremental gallon we need more and more money.발음듣기
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The marginal cost for that incremental gallon for the market as whole is going higher and higher we have to get orange juice further away and transport them further and further,발음듣기
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Now let's draw an arbitrary demand curve here so the demand curve let's say it looks something like this.발음듣기
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Now I am going to add to this price at which firms or the suppliers of the orange juice make our neutral with our terms to our economic profit.발음듣기
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And I want to remind you economic profit being zero does that mean the accounting profit is zero.발음듣기
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People could be making money at this price it just say that there is neutral whether or not they should be.발음듣기
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That the amount of money that they're making is roughly comparable to their opportunity cost to be doing other things.발음듣기
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When I say economic profit is 0, sometimes that's called the normal profit, when economic profit is 0.발음듣기
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This is the price at which people are neutral between shutting down and starting up their business.발음듣기
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If you have positive economic profit, that means that more people will want to go into this market and if you have negative economic profit, that means that people are going to want to essentially use up their fixed expenses, 발음듣기
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Let's say a research paper comes out and in that research paper, for whatever reason, we don't know if it was well-done research.발음듣기
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At any given price, demand will go down, and the new demand curve might look something like this.발음듣기
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Now, in the near term, we have a new equilibrium price, and we have a new equilibrium quantity.발음듣기
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This was the old equilibrium price, the way I set that up, it just happened to be the price at which economic profit is 0, and this was our old equilibrium quantity, a little over 3 million gallons a week.발음듣기
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I don't know, this looks about 40 cents per gallon, and we have a new lower equilibrium quantity.발음듣기
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Obviously in the near term, people are willing to produce there because that's where their marginal cost is, 발음듣기
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so, as we saw in multiple videos that someone's willing to produce when the price is equal to their marginal cost, or they're willing to produce a quantity up to when their marginal cost is equal tithe marginal revenue, or the price that they're going to get.발음듣기
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But, I just said that they need to be getting 50 cents a gallon in order to make an economic profit.발음듣기
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Now if they get, I don't know, this looks like about 40 cents a gallon, they're going to be having an economic loss.발음듣기
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If there's no profit there, it really doesn't make sense for them to continue, or at least it doesn't make sense for all of them to continue in that business.발음듣기
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What's going to happen is that over time, it will make sense for them in the near term to produce, to use up, they've already put in their cost for their equipment and maybe labor contracts and whatever else.발음듣기
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But over time, when prices are this low, as people use up their equipment, there's no incentive for them to buy new equipment.발음듣기
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That's the point, once the price is at 50 cents a gallon again, then people are neutral now.발음듣기
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We're going to get to this new equilibrium price and equilibrium quantity in the long term, in the long term.발음듣기
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Instead of a newspaper report saying that oranges are bad, let's say a newspaper report comes out saying oranges are very good.발음듣기
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Well, then, at any given price, you're going to have more demand, and so you'd have a demand curve that looks something like that.발음듣기
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And, people are going to be making, since the price is higher, than the price at which the economic profit is 0,발음듣기
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people are going to be making very positive economic profits, which means that there's a strong incentive, that people are neutral between shutting down the business or starting up the business.발음듣기
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What's going to happen is, more and more people are going to get more and more equipment, hire more and more people, and as they do that, quantity is going to go up, and the price is going to go down.발음듣기
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What you see happening is in the short term, you would look at where the demand curve intersects with the short-term supply curve, 발음듣기
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but in the long term, you care where it intersects with this kind of horizontal line, which is the price at which economic profit is 0.발음듣기
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That's why you will hear, and this is kind of a more precise way of thinking about it than we've done in the previous videos, this horizontal line right over here, 발음듣기
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you could view this as the long run, the long run, long run supply curve, long run supply curve.발음듣기
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That says look, pretty much whatever we will always produce over the long run, we will always produce whatever supply is kind of necessary, given that people are neutral when it comes to economic profit.발음듣기
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You go down here, yes, people will try to use up their fixed costs, but once they used up their fixed costs, no incentive for them to stay in business, then some of them go out of business.발음듣기
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You get back to the long run supply curve, where that intersects with the demand curve, or if the opposite happens.발음듣기
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A lot of economic profit, a lot of entrance into the market, price goes down, supply goes up.발음듣기
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