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### Course: Microeconomics>Unit 6

Lesson 4: Types of profit

# Long term supply curve and economic profit

Understanding the long term supply curve in terms of economic profit. Created by Sal Khan.

## Want to join the conversation?

• How do you know which equilibrium price at any time is the one that delivers zero economic profit? Wouldn't any new equilibrium price mean that the producers there have no economic incentive to leave- assuming that relatively high cost producers left the scene when a lower equilibrium price is reached?
• This video covers the case of a Constant Cost Industry, where the industry output doesn't affect the costs of the individual firms (this graph is not shown in the video). An Increasing Cost Industry occurs when an expansion in industry output increases the costs of the individual firm. With a Decreasing Cost Industry, industry expansion drives down firm costs.
• In the real world, how would someone actually determine the demand curve for a good?
• Actual supply and demand are based on judgement and calculations. For example, a grocery store runs out of powdered milk. So, the store asks the supplier to make them powdered milk. So the supplier lists it down in their "demand" list and totals it up when the year is over. It's done together with the inventorying and accounting. Then, from this, they deduce that they should produce the same amount next year as well. They make actual curves/charts and map the patterns. That is how I see demand and supply in simple terms. I did a very small business before with my sister and this is how we found out what the demand and supply were. For bigger companies, I think they do statistical calculations like probability and so on.
• Isn't the economic profit comparing two business domains to figure out which one is the more profitable to operate in? So when saying econ. profit equals zero, what are we comparing it with?
• Whenever economic profit is zero, all costs are covered by the revenue, both explicit and implicit. This differs from an accounting zero where only the explicit costs are covered.
• At , it seems counter-intuitive that the supply curve will move down as more firms enter the market... I can see how this would be the case for each individual firm (having an increasingly smaller share of the market), but not for the industry curves. Is this a model of both the industry AND an individual firm?
• The Supply and Demand curves presented in the video are market curves. And one of the factors affecting the market curve is the number of participants (eg number of sellers for the market supply curve). So additional sellers will increase Supply (shift the curve down).
• Wouldn't Supply Curve SHIFT to right in the long term in case of increase in orange demand, and SHIFT to left in case of decrease in demand. If yes, then why is Sal talking about 'Quantities' here, or in other words, about the movement along the curve...?
• Even if demand rises or falls, production costs remain the same (which is why it moves along the curve instead of moving the curve).

Moving the curve left or right means you are willing to produce less or more at the same market price.
(1 vote)
• Would it be fair to say that the supply is basically perfectly elastic on the long run?
• Yes, for a single firm, we can pretty much say that supply is perfectly elastic in the long run. This is because we assume that factors of production, in the long run, can easily be moved between firms and different industries.
• At , why does the price raise?
(And why does it fall back to 50ct/gallon after it was raised by the study?)
Shouldn't the supply fall back to a point where the equilibrium of now 40ct/gallon (in the first scenario) is reached and stay at this point until the demand changes?
If seen as a completely new market situation the history of the market in this simplified model should have no effect on the current price, as there is now a equilibrium price at 40ct/gallon.

The only reasons I could make up for a raising price is either a overcompensation of the supplying companies, meaning a higher cut in supply so the demand isn't covered anymore (meaning a short term price increase) or a vanishing effect of the study.
(1 vote)
• In the first scenario, the price goes back to \$0.50/gal because suppliers are not making any economic profit with the price at \$0.40/gal, so they will exit the market altogether, resulting in a decrease in supply, causing the price to increase again. In the second scenario, the opposite happens. Suppliers are making a decent economic profit, so new suppliers enter the market, causing supply to increase, which results in a decrease in price.
• In my school my professor taught us that the Long Run supply curve is a Vertical Line?
Can someone help me out?
• This means he is taking a new classical approach. He assumes that in the long-run, there is a full level of employment and thus the production is maximised (productive efficiency is achieved).
(1 vote)
• at , I am not very clear as to how the supply curve is also the MC curve?