AP_Krugman_Textbook

The market demand curve, labeled Din Figure 60.1, crosses the short-run industry
supply curve at EMKT,corresponding to a price of $18 and a quantity of 500 bushels.
Point EMKTis a short-run market equilibrium:the quantity supplied equals the
quantity demanded, taking the number of farms as given. But the long run may look
quite different because in the long run farms may enter or exit the industry.

The Long-Run Industry Supply Curve

Suppose that in addition to the 100 farms currently in the organic tomato business,
there are many other potential organic tomato farms. Suppose also that each of these
potential farms would have the same cost curves as existing farms, like the one owned
by Jennifer and Jason, upon entering the industry.
When will additional farms enter the industry? Whenever existing farms are making
a profit—that is, whenever the market price is above the break-even price of $14 per
bushel, the minimum average total cost of production. For example, at a price of $18
per bushel, new farms will enter the industry.
What will happen as additional farms enter the industry? Clearly, the quantity sup-
plied at any given price will increase. The short-run industry supply curve will shift to the
right. This will, in turn, alter the market equilibrium and result in a lower market price.
Existing farms will respond to the lower market price by reducing their output, but the
total industry output will increase because of the larger number of farms in the industry.
Figure 60.2 illustrates the effects of this chain of events on an existing farm and on
the market; panel (a) shows how the market responds to entry, and panel (b) shows

module 60 Long-Run Outcomes in Perfect Competition 601

Section

(^11)
(^) Market
(^) Structures:
(^) Perfect
(^) Competition
(^) and
(^) Monopoly
30 4 4.5 5 6
$18
16
14
Quantity of tomatoes (bushels)
Price, cost
of bushel
Break-
even
price
0 500 750 1,000
$18
16
14
Quantity of tomatoes (bushels)
Price
of bushel

D

E

C

D

Y

Z

MC

ATC

A

B

(a) Market (b) Individual Firm

14.40

EMKT

DMKT

CMKT

S 1 S 2 S 3

figure 60.2 The Long-Run Market Equilibrium

Point EMKTof panel (a) shows the initial short-run market equilib-

rium. Each of the 100 existing producers makes an economic profit,

illustrated in panel (b) by the green rectangle labeled A,the profit of

an existing firm. Profits induce entry by additional producers, shifting

the short-run industry supply curve outward from S 1 to S 2 in panel

(a), resulting in a new short-run equilibrium at point DMKT,at a lower

market price of $16 and higher industry output. Existing firms re-

duce output and profit falls to the area given by the striped rectangle

labeled Bin panel (b). Entry continues to shift out the short-run in-

dustry supply curve, as price falls and industry output increases yet

again. Entry ceases at point CMKTon supply curve S 3 in panel (a).

Here market price is equal to the break-even price; existing produc-

ers make zero economic profits and there is no incentive for entry or

exit. Therefore CMKTis also a long-run market equilibrium.

There is a short-run market

equilibriumwhen the quantity supplied

equals the quantity demanded, taking the

number of producers as given.