Long-run outcomes - Microeconomics AP Study Notes
Overview
Imagine you open a lemonade stand. If you're making tons of money, what do you think your friends will do? They'll probably open their own lemonade stands nearby, right? And if you're losing money, you might just pack up and go home. That's exactly what "long-run outcomes" in microeconomics is all about! It helps us understand what happens to businesses and prices in a market over a long period when there's enough time for new businesses to pop up or old ones to shut down. It's super important because it shows us how markets naturally adjust and find a balance, impacting everything from the price of your favorite snack to how many jobs are available.
What Is This? (The Simple Version)
Think of the "long run" in economics like a really, really long game of hide-and-seek. In the short run, players (businesses) are stuck in their current hiding spots (factories, equipment). But in the long run (a period of time long enough for businesses to change everything), players can:
- Enter the game: New businesses can decide to join the market if they see others making a lot of money.
- Exit the game: Businesses that aren't doing well can pack up and leave the market.
- Change their size: Businesses can build bigger factories, buy more machines, or even shrink down if they need to.
So, "long-run outcomes" are simply the final, stable results we expect to see in a market after all these changes have had a chance to happen. It's like predicting where everyone will end up after the hide-and-seek game is totally over and everyone has either found a new spot or gone home.
Real-World Example
Let's use the example of food trucks in a popular park. Imagine there's only one food truck, 'Awesome Tacos,' and they're making a huge profit because everyone loves their tacos and there's no competition.
- Short-run success: 'Awesome Tacos' is raking in cash. They're making an economic profit (more money than all their costs, including what the owner could earn doing something else).
- Attracts new players: Other aspiring food truck owners see 'Awesome Tacos' making bank. They think, "Hey, I can make tacos too!" So, new food trucks like 'Super Burritos' and 'Yummy Nachos' decide to enter the park.
- Increased competition: Now there are more food trucks selling similar food. This means customers have more choices. To attract customers, the food trucks might have to lower their prices or offer specials.
- Profits shrink: As prices go down and competition heats up, 'Awesome Tacos' and the other trucks start making less money. Their economic profit gets smaller and smaller.
- Long-run equilibrium: Eventually, so many food trucks enter that no one is making an economic profit anymore. They're just making enough to cover their costs and pay themselves a normal wage (this is called normal profit). If anyone starts losing money, they'll leave. If anyone starts making too much, new trucks will enter until profits are back to normal. This stable state, where no one wants to enter or exit, is the long-run outcome.
How It Works (Step by Step)
Here's how a perfectly competitive market (where there are many small businesses selling identical products) reaches its long-run outcome: 1. **Start with economic profit**: If existing businesses are making **economic profit** (earning more than all their costs, including the opportunity cost of ...
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Key Concepts
- Long Run: A period of time long enough for firms to change all of their inputs, including their factory size and number of firms in the market.
- Short Run: A period of time where at least one input (like factory size) is fixed, and firms cannot easily enter or exit the market.
- Economic Profit: Total revenue minus all explicit (out-of-pocket) and implicit (opportunity) costs; it's profit above and beyond what could be earned in the next best alternative.
- Normal Profit: The minimum profit necessary to keep a firm in operation in the long run, equal to zero economic profit.
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Exam Tips
- →Always clearly distinguish between the short run and the long run in your answers; the rules for firms are different!
- →When asked about long-run equilibrium, remember to mention **zero economic profit**, productive efficiency, and allocative efficiency for perfectly competitive markets.
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