lgwwin's Notes
  1. $Y$ only denotes income, not output. It equals output only in the equilibrium case. see Domar Growth Model
  2. Points About Long Run Equilibrium

We have seen that profits will lead to the entry of new firms into a P-competitive industry. This also works in the opposite direction: if firms in the industry were taking losses, supply in the industry will decrease. Firms in the industry might continue to produce in the short run, despite the losses. Remember — from the last chapter — that a profit-maximizing firm will continue to produce, in the short run, so long as it can cover its variable costs. However, in the long run, firms will drop out of the industry, if they continue to lose money. Thus, the supply curve of the unprofitable industry will shift to the left. But that in turn means prices will rise, and the long run equilibrium comes where the price is equal to average cost, as shown in Figure 2.

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License