(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 325

300 PART • Producers, Consumers, and Competitive Markets S Price (dollars per unit of output) F IGURE 8.12 PRODUCER SURPLUS FOR A MARKET P* The producer surplus for a market is the area below the market price and above the market supply curve, between and output Q* Producer Surplus D Q* Output surplus for a market This can be seen in Figure 8.12 The market supply curve begins at the vertical axis at a point representing the average variable cost of the lowest-cost firm in the market Producer surplus is the area that lies below the market price of the product and above the supply curve between the output levels and Q* 8.7 Choosing Output in the Long Run In the short run, one or more of the firm’s inputs are fixed Depending on the time available, this may limit the flexibility of the firm to adapt its production process to new technological developments, or to increase or decrease its scale of operation as economic conditions change In contrast, in the long run, a firm can alter all its inputs, including plant size It can decide to shut down (i.e., to exit the industry) or to begin producing a product for the first time (i.e., to enter an industry) Because we are concerned here with competitive markets, we allow for free entry and free exit In other words, we are assuming that firms may enter or exit without legal restriction or any special costs associated with entry (Recall from Section 8.1 that this is one of the key assumptions underlying perfect competition.) After analyzing the long-run output decision of a profit-maximizing firm in a competitive market, we discuss the nature of competitive equilibrium in the long run We also discuss the relationship between entry and exit, and economic and accounting profits Long-Run Profit Maximization In §7.4, we explain that economies of scale arise when a firm can double its output for less than twice the cost Figure 8.13 shows how a competitive firm makes its long-run, profit-maximizing output decision As in the short run, the firm faces a horizontal demand curve (In Figure 8.13 the firm takes the market price of $40 as given.) Its short-run average (total) cost curve SAC and short-run marginal cost curve SMC are low enough for the firm to make a positive profit, given by rectangle ABCD, by producing an output of q1, where SMC ϭ P ϭ MR The long-run average cost curve LAC reflects the presence of economies of scale up to output level q2 and diseconomies of scale at higher output levels The long-run marginal cost curve LMC cuts the long-run average cost from below at q2, the point of minimum long-run average cost