5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

126 › Step 4. Review the Knowledge You Need to Score High

Summarizing in Table 9.5, there are four possible short-run scenarios and resulting

long-run adjustments to the perfectly competitive equilibrium, which always ends in the

same place.

Table 9.5

THE FIRM SHORT-RUN

WHEN THE PRODUCES ECONOMIC IN THE THE LONG-RUN

SHORT RUN º WHERE º PROFITS ARE º LONG RUN º OUTCOME IS º

P>ATC MR =MC Positive Firms enter PLR= MR =MC =

ATC and P= 0

P=ATC MR =MC Zero, break even No entry or exit PLR=MR =MC =

ATC and P= 0

AVC <P MR =MC Negative Firms exit PLR=MR =MC <

<ATC 0 >P>-TFC ATC and P= 0

P<AVC Zero, Negative Firms exit PLR=MR =MC =

shut down (=-TFC) ATC and P= 0

Are There Variations on This Story and Do I Need to Know Them?

The answer to these questions are yes, and maybe. Throughout this section we have made

an assumption that entry and exit of firms has no impact on the cost curves of firms in the

market. In other words, we have been assuming a constant cost industry. Recent AP

Microeconomics exams have made references to constant cost industries and (maybe)

caused unnecessary confusion for test takers. It is always possible that future exams will refer

to constant, increasing, or decreasing cost industries, so you should probably become famil-

iar with these terms. A quick explanation and you will not be one of the confused.

Suppose that entry of new firms into a profitable carrot market increases the demand for key

resources like land, labor, and capital. Increased demand for these resources might increase the

cost of employing those resources. When this happens, the cost curves for firms in the carrot

industry start to shift upward. This situation is described as an increasing cost industry.

Graphing this situation gets sticky, but if you follow the logic, you will be fine. The entry of new

firms drives down the price of the output andincreases the cost curves, so the profit is eliminated

more quickly than with our constant cost industry. Fewer firms eventually enter this version of

the carrot market, and the new long-run price is higher than it is in a constant cost industry.

PLR

AVC

S = ΣMC

D

Quantity Quantity

Pe

PLR

d = Pe = MR

$P $P

The U.S. Carrot Market One Carrot Producer

Qe qe

MC

AT C

qLR

Pe

QLR

Figure 9.9

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