Figure 9-11 Short-Run Versus Long-Run Profit Maximization for a
Competitive Firm
3. Existing firms must not be earning profits. If they are earning
profits, then new firms will enter the industry and the size of the
industry will increase over time.
4. Existing firms must not be able to increase their profits by
changing the size of their production facilities. Thus, each
existing firm must be at the minimum point of its long-run
average cost (LRAC) curve.This last condition is new to our discussion. Figure 9-11 shows that if
the condition does not hold—that is, if the firm is not at the minimum of
its LRAC curve—a firm can increase its profits. In the case shown,
although the firm is maximizing its profits with its existing production
facilities, there are unexploited economies of scale. By building a larger
plant, the firm can move down its LRAC curve and reduce its average
cost. Alternatively, if the firm were producing at an output that put it
beyond the lowest point on its LRAC curve, it could raise its profits by
reducing its plant size. Because in either situation average cost is just
equal to the market price, any reduction in average cost must yield
profits.