15.2 Perfect Competition: Short and Long-Run Responses - A Change in Fixed Costs

The video introduces an example where firms in perfect competition experience a decrease in fixed costs, such as software becoming free. This leads to a downward shift in the average total cost curve, while marginal cost and price remain unchanged. Consequently, firms now have a price above their average total cost, resulting in short-run economic profits.

In the long run, the existence of economic profits attracts new firms to enter the market. This entry increases the overall market supply, which in turn drives down the market price. The supply curve shifts incrementally until the new equilibrium price is established.

At the new long-run equilibrium, the price will once again be equal to both marginal cost and average total cost, resulting in zero economic profits for firms. Due to the entry of more firms into the market, the total quantity supplied in the market will be higher than before the fixed cost change.

This example highlights how firms and markets in perfect competition adjust in both the short and long run when faced with a change in fixed costs. The initial decrease in fixed costs leads to short-run profits, which then trigger long-run market adjustments such as entry and a lower equilibrium price, ultimately leading to zero economic profits and a higher market quantity.