9.4 Long-Run Decisions

In Chapters 7 and 8 , we described the short run as the span of time for
which individual firms have a fixed factor of production (typically capital),
and the long run as the span of time for which all of the firm’s factors are
variable. When we look at the entire industry, the distinction is very
similar. In the short run, there is a given number of firms and each has a
given plant size. In the long run, both the number of firms and the size of
each firm’s plant are variable.

We begin our discussion of the long run by assuming that all firms in the
industry have the same technology and therefore have the same set of
cost curves. Thus, the short-run equilibrium in the industry will have
firms in the industry being equally profitable (or making equal losses).
Toward the end of the chapter we relax this assumption when we allow
new firms to have better technologies and thus lower costs than older
firms already in the industry.

Entry and Exit

The key difference between a perfectly competitive industry in the short
run and in the long run is the entry or exit of firms. We have seen that all
the firms in the industry may be making profits, suffering losses, or just
breaking even when the industry is in short-run equilibrium. Because

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