Your task: Draw a market supply shift from entry and a separate firm graph with price and minimum average cost. Explain which conclusion would change if input costs rose with industry size.
Read counts with their units. A percentage divides a part by its named whole and multiplies by 100. A model assumption is not an observed fact.
Economic profit
Revenue minus all economic costs, including the opportunity costs of owned inputs.
Assumption
A condition accepted for a model or argument; it needs justification before applying the result elsewhere.
01 · TRY
Why can short-run profit disappear after entry?
Draw a market supply shift from entry and a separate firm graph with price and minimum average cost. Explain which conclusion would change if input costs rose with industry size.
Draw a market supply shift from entry and a separate firm graph with price and minimum average cost. Explain which conclusion would change if input costs rose with industry size. Use the supplied records and show one intermediate step.
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04 · UNDERSTAND
Connect evidence and mechanism
Connect firm profits with market entry
Question and record
Why can short-run profit disappear after entry?
A fictional competitive industry has demand Q=120−10P. Each identical firm’s minimum long-run average total cost is 4 at output 5. Initially 10 firms produce 5 units each and market price is 7. Entry is possible with the same technology. Each existing plant has short-run capacity5; entrants can build the same efficient plant.
The quantities and graphs are teaching assumptions, not observed policy outcomes.
Mechanism and worked calculation
Positive economic profit can attract entry, shifting market supply and reducing price in a competitive setting. Long-run equilibrium in a constant-cost model has price at minimum average total cost, with no incentive to enter or exit. Increasing- or decreasing-cost industries change the long-run supply relationship because input costs respond to scale.
At price 4, market demand is 120−40=80. With each firm supplying 5, the model supports 16 firms. Initial per-firm profit under the cost assumption is (7−4)×5=15; entry erodes that surplus over opportunity costs.
Challenge the interpretation
The calculation assumes a constant-cost industry and identical firms. Input prices may rise or fall as an industry expands, and barriers may prevent entry. Zero economic profit includes normal opportunity costs; it does not mean owners receive no compensation.
Your evidence task
Draw a market supply shift from entry and a separate firm graph with price and minimum average cost. Explain which conclusion would change if input costs rose with industry size.
Revise your answer to “Why can short-run profit disappear after entry?” using both source IDs. Separate the checked calculation from a judgment, and identify evidence that could reverse your judgment.
Vocabulary
Economic profit: Revenue minus all economic costs, including the opportunity costs of owned inputs.
Assumption: A condition accepted for a model or argument; it needs justification before applying the result elsewhere.
Independent extension
Independently extend the investigation “Connect firm profits with market entry” with a documented real dataset or scholarly source. Preserve definitions, recreate one calculation or evidence table, compare a rival explanation and report why the teaching example cannot establish the real-world conclusion.
Follow a demand shock through market and firm
A new original fictional industry has market demand Q=40−5P and ten identical firms. Each firm's total economic cost per period is TC=4+q²; marginal cost MC=2q, average variable cost AVC=q, and average total cost ATC=4/q+q for q>0. Capital choices and entry are fixed in the short run. In the long run, exiting avoids the fixed cost of 4 and entrants can use the same technology.
Predict: after higher demand, which changes first: price, each firm's output or the number of firms? After lower demand, must a firm with an economic loss shut down immediately? Write your paired market/firm prediction.
Writing is temporary; copy the report before leaving. The existing lesson's earlier capacity example is separate; these cost equations replace none of its assumptions.
Each operating price-taking firm chooses P=MC=2q, so q=P/2. Aggregate supply is Q=N×P/2. Equating demand 40−5P with supply 10P/2 gives P=40/(5+10/2)=4. The market determines the firm's horizontal price line; one firm does not face the whole market demand curve.
Market: Q=0–60, P=0–12. Solid demand is the selected checkpoint; dashed demand is the initial one. Supply uses the current N.Representative firm: q=0–6, cost/price=0–12. Solid rising line MC; dashed rising line AVC; curved line ATC. Gold horizontal line is market price.
Reconcile economic profit with the shutdown comparison
Revenue=8, variable cost=4, committed fixed cost=4, total cost=8 credits. Economic profit = revenue−total = 0 credits. At this output ATC=4 and AVC=2 credits/unit. The shaded rectangle has magnitude q×|P−ATC|=0; text identifies profit or loss.
Closing for this period earns zero revenue but still pays the committed 4, giving −4. Operating gives 0, so operating is better than short-run closure in this case. Long-run exit can avoid that fixed cost. Do not treat a committed cost as avoidable just because current profit is negative.
Explain entry, exit and efficiency
ATC=4/q+q reaches minimum 4 at q=2: ATC−4=(q−2)²/q≥0. With unchanged input prices and free entry/exit, the long-run price returns to 4. At the changed demand, Q=60−5×4=40, requiring N=Q/2=20: 10 additional firms than initially.
At every displayed interior equilibrium P=MC. Interpreting that as allocative efficiency requires the stated competitive/no-externality assumptions. Productive efficiency at minimum ATC occurs at q=2; short-run adjustment can have q≠2. Zero economic profit covers normal opportunity costs and is not zero compensation. The three checkpoints specify equilibria, not the speed, probability or actual path of entry and exit.
Transfer: switch to lower demand at checkpoint 2. Show why a loss-making firm continues temporarily, then explain why the long-run price rises back while total output falls. Name a barrier or input-cost change that would invalidate the return-to-4 prediction without inventing its size.
Compare with the reasoning guide
Initially P=4, q=2, Q=20, N=10 and profit=0. Higher demand first gives P=6, q=3, Q=30, N=10 and profit=5; long-run entry gives N=20, P=4, q=2, Q=40. Lower demand first gives P=3, q=1.5, Q=15, N=10 and profit=−1.75, better than closing at −4. Exit then leaves N=5, P=4, q=2, Q=10. Price rises after the negative shock's short-run checkpoint, but it returns only to its original level and quantity stays below the original total.
Changing demand shifts the market curve; a firm moves along its MC response to the resulting price. Entry/exit subsequently changes market supply, while constant input prices keep each firm's cost curves fixed. Without these assumptions, the return-to-4 result need not hold. The graphs alone do not prove actual adjustment speed or a real-world causal effect.
Method reference and fictional-model scope
OpenStax Principles of Microeconomics 3e, section 8.3 provides context for entry, exit and constant-cost adjustment. Equations, values and graphics here are original teaching material. No observed dataset or copied textbook case. Assumptions include identical price takers, homogeneous output, no externalities, free entry/exit, unchanged input prices and no adjustment costs. The chosen demands give whole-number equilibrium firm counts; no fractional firm is silently rounded.
Copy the paired adjustment report
The report includes all three checkpoints and your selected state. Reset clears writing and restores higher-demand/initial, retaining this mount's guidance exposure; reload clears exposure. Ungraded reasoning is not independent mastery.
Worked example
At price 4, market demand is 120−40=80. With each firm supplying 5, the model supports 16 firms. Initial per-firm profit under the cost assumption is (7−4)×5=15; entry erodes that surplus over opportunity costs.
