Principles of Microeconomics / Unit 9 MIC 0809 worked example, 60 to 90 seconds
Tracing Entry to the Tangency
The idea
Start with a firm earning profit in the short run. Entry shifts its demand curve left. Recompute: marginal revenue shifts with demand, the profit-maximizing quantity falls, and the price read from the new demand curve falls. Compare the new price with average total cost at the new quantity. If price still exceeds average cost, entry continues; when price equals average cost, the tangency has been reached and the process stops. State the long-run outcome: a smaller quantity, a lower price, zero economic profit.
In practice
Worked example: the pizza shop earned one hundred twenty a day at forty pizzas and sixteen dollars. New shops open until its demand has shifted left to thirty pizzas at fourteen dollars, where marginal revenue meets marginal cost. Average total cost at thirty pizzas is fourteen. Price equals average cost, profit is zero, and entry stops. The shop sells ten fewer pizzas at two dollars less than before, and it covers its costs, including the owner's forgone wage, exactly.
Where people slip
The demand curve shifts; the cost curves do not. The error is to shift average cost up to meet the old demand, which describes a cost increase rather than entry. And the tangency is on the downward-sloping part of average cost, which is the next video's point.
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