Time horizon: short run and long run

  • The previous analysis occurred assuming that entry or exit could not occur
    • In economics, we call this the short run
  • In order for our model to (better) reflect reality, we want to allow firms to enter or exit the market
    • Graphically, a long run competitive equilibrium is a horizontal supply curve, whose height is the minimum of firms’ average total cost curve
    • This ensures our zero profit condition is met (i.e. no firm has incentive to enter or exit the market)