Authors libby rittenberg 497

In the long run, a firm is free to adjust all of its inputs New firms can enter any market; existing firms can leave their markets We shall see in this section that the model of perfect competition predicts that, at a long-run equilibrium, production takes place at the lowest possible cost per unit and that all economic profits and losses are eliminated Economic Profit and Economic Loss Economic profits and losses play a crucial role in the model of perfect competition The existence of economic profits in a particular industry attracts new firms to the industry in the long run As new firms enter, the supply curve shifts to the right, price falls, and profits fall Firms continue to enter the industry until economic profits fall to zero If firms in an industry are experiencing economic losses, some will leave The supply curve shifts to the left, increasing price and reducing losses Firms continue to leave until the remaining firms are no longer suffering losses— until economic profits are zero Before examining the mechanism through which entry and exit eliminate economic profits and losses, we shall examine an important key to understanding it: the difference between the accounting and economic concepts of profit and loss Economic Versus Accounting Concepts of Profit and Loss Economic profit equals total revenue minus total cost, where cost is measured in the economic sense as opportunity cost An economic loss (negative economic profit) is incurred if total cost exceeds total revenue Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 497