Suppose a firm is earning economic losses in the short run...

Suppose a firm is earning economic losses in the short run. In the long-run, it will: Group of answer choices earn positive economic profit. earn zero economic profit. exit the industry. produce at a loss.

Transcript

00:01 So here i've drawn to market with a short -term supply curve and a long -term supply curve, right? the short -term supply curve is our normal supply curve sloping up, indicating that firms require a higher price to bring a larger quantity to market, right? and this happens because in the short term, you can't fully adjust your business model, right? if you have a bunch of more orders, maybe you need to pay your staff overtime, maybe you need to run that third shift, maybe you need to, you know, rent expensive capital, at the last moment, your business plan is not made to react to massive increases in quantity.

00:37 And so your costs, your business model is not built for it, right? and because your business model is working to produce a quantity it's not intended to do, it doesn't produce higher quantities that efficiently, and you need higher prices to go to market, right? but in the long run, business models can adjust, right? in the long run, if the price is above long run average cost, every people who are outside the industry will say, look, the price is higher than long run average cost.

01:05 I can open a new firm price at long run average cost or just above it and earn my cost of capital or, right, earn my economic opportunity cost.

01:14 And as many of those people can enter the business as they want, but that might take time.

01:20 They have to build factories, they have the higher employees, they have to integrate into the industry.

01:24 The increasing of the number of firms in the industry who are producing at the minimum of that long -run average cost curve can take time, right? that's pretty normal, right? in the long run, more adjustments can happen.

01:36 Firms can enter, and the short -run firms can't really enter, right? so here we've got an increase in demand, demand increases, and that will give us a short -run equilibrium and a long -run equilibrium.

01:49 So in the short -run, there will be profits, absolutely, right? the price of this good jumps, there are only a fixed number of firms in the industry.

01:59 These firms suddenly have the, you know, can raise their prices because they can't produce all that much.

02:03 And so there will absolutely be profits...

Question

Suppose a firm is earning economic losses in the short run. In the long-run, it will: Group of answer choices earn positive economic profit. earn zero economic profit. exit the industry. produce at a loss.

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