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Competitive Equilibrium 293

minimum LAC). The market is in equilibrium. Industry demand exactly

matches industry supply. All firms make zero economic profits; no firm has an

incentive to alter its output. Furthermore, no firm has an incentive to enter or

exit the industry.

FIGURE 7.4

Competitive Price and

Output in the Long Run

An increase in demand

from D to Dhas two

effects. In the short run,

the outcome is E; in the

long run (after entry by

new firms), the outcome

is E*.

P = $6

$4

$8

Cost and Revenue per Unit

Output (Thousands of Units)

100 280240200

E E*

E′

D′

D

Supply curve

after entry

D′

D

Supply curve

before entry

0

CHECK

STATION 3

In the perfectly competitive market described in Check Station 2, what is the equilib-

rium price in the long run? (Hint:Find the typical firm’s point of minimum average cost

by setting AC MC.) Find the output level of the typical firm. Let industry demand be

given by the equation QD 320 20P. Find total output in the long run. How many

firms can the market support?

Now consider the effect of a permanent increase in market demand. This is

shown as a rightward shift of the demand curve (from DD to DD) in Figure 7.4.

The first effect of the demand shift is to move the market equilibrium from

E to E. At the new equilibrium, the market price has risen from $6 to $8 and

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