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M19.L05 — Long-Run Industry Equilibrium and Zero Profit

Module: Module 19 — Costs, Competitive Supply, and Industry Equilibrium Lesson: L05 of 05 Duration: ~30 minutes Level: Intermediate Provenance: Principles of Microeconomics (Curtis and Irvine) | University of Utah Intermediate Microeconomics

Learning Objective

Explain zero-profit conditions in long-run competitive equilibrium.

Long-Run Industry Equilibrium and Zero Profit

In the long-run, free entry/exit drives economic profit to zero: - Firms produce at minimum long-run average total cost (\(P = \min LRATC\)). - The efficient scale is the output where \(LRATC\) is minimized. - Industry size adjusts until \(P = LRATC\) (zero economic profit).

Rent and quasi-rent: - Economic rent: Payments to inputs above opportunity cost. - Quasi-rent: Short-run returns to fixed inputs (e.g., machinery).

Zero economic profit ≠ zero accounting profit: Accountants exclude opportunity costs (e.g., owner's time).

Worked Example

[Australian context]

Australian cafes face \(LRATC = y^2 - 10y + 30\). Market demand is \(D(p) = 200 - 2p\).

  1. Efficient scale: Minimize \(LRATC\): \(\frac{d}{dy} LRATC = 2y - 10 = 0\) ⇒ \(y = 5\), \(\min LRATC = 5^2 - 10 \cdot 5 + 30 = 5\).
  2. Equilibrium: \(P = 5\), \(D(5) = 200 - 10 = 190\), so \(\# \text{firms} = \frac{190}{5} = 38\).
  3. Quasi-rent: If \(P = 8\), each cafe earns \(\pi = 8 \cdot 5 - (5^2 - 10 \cdot 5 + 30) = 15\) (quasi-rent).

Common Misconception

**"Zero profit means firms are barely surviving."

Correction: Zero economic profit means firms earn normal returns (covering opportunity costs). Accounting profits may be positive.

Key Takeaways

  • Long-run equilibrium: \(P = \min LRATC\) and \(\pi = 0\).
  • Efficient scale minimizes \(LRATC\).
  • Rent compensates for input scarcity; quasi-rent is short-run surplus.
  • Zero economic profit ≠ zero accounting profit.

Practice

  1. Find the efficient scale for \(LRATC = 0.2y^2 - 4y + 25\).
  2. Explain why Australian agriculture might have zero economic profit but positive accounting profit.
  3. How does quasi-rent differ from economic rent?

Further Resources

Provenance: Principles of Microeconomics (Curtis and Irvine) | University of Utah Intermediate Microeconomics