Simple Explanation: Entry and Exit's Long-Run Effect on Demand & MR Curves

📚 Long-Run Effects of Entry and Exit on Demand & MR Curves

In the long run, the entry and exit of firms in a market significantly impact the demand and marginal revenue (MR) curves, especially in perfectly competitive and monopolistically competitive markets. Here's a breakdown:

• 🚪 Entry of New Firms: When new firms enter a market, it typically indicates that existing firms are making economic profits. The entry of new firms increases the overall supply in the market.
• 📉 Impact on Demand: With more firms supplying goods or services, the market share of each individual firm decreases. This leads to a leftward shift in the demand curve faced by each firm. This means that at any given price, the firm can sell less quantity than before.
• 🔻 Impact on Marginal Revenue (MR): The marginal revenue curve also shifts downward and becomes steeper. This is because each additional unit sold brings in less additional revenue compared to before the entry of new firms. The increased competition forces firms to lower prices to attract customers.
• ⚖️ Long-Run Equilibrium: Entry continues until economic profits are driven to zero. At this point, the demand curve for each firm is tangent to its average total cost (ATC) curve. This ensures that firms are earning only normal profits, and there is no further incentive for entry.
• 🚶 Exit of Firms: Conversely, if firms are incurring losses, some will exit the market. This reduces the overall supply.
• 📈 Impact on Demand (Exit): The demand curve faced by the remaining firms shifts to the right, as the market share of each remaining firm increases. Each firm can now sell more at any given price.
• 🔼 Impact on Marginal Revenue (MR) (Exit): The marginal revenue curve also shifts upward. Each additional unit sold brings in more additional revenue compared to before the exit of firms.
• 🎯 New Long-Run Equilibrium: Exit continues until the remaining firms are earning normal profits. The demand curve for each firm is again tangent to its ATC curve, ensuring zero economic profit and stability in the market.

Summary Table: Effects on Demand and MR Curves