Summary
Highlights
The video begins by illustrating a market in equilibrium with supply and demand curves, where a large number of identical firms operate. Each firm, acting as a price taker, sees the market-determined price and sets its production where price equals marginal cost, leading to an initial quantity Qstar.
When there's an increase in demand in the market, the demand curve shifts upwards, resulting in a higher market price. Individual firms perceive this new higher price and increase their production to Q1, where the new price equals their marginal cost. This scenario leads to short-run profits for the firms, as the price is now above their average total cost.
In the long run, positive economic profits attract new firms to enter the market. This entry causes the market supply curve to shift outwards, which brings the market price back down to its original equilibrium level. Consequently, individual firms reduce their production back to Qstar, eliminating economic profits.
While individual firms return to their original production quantity (Qstar), the overall market quantity increases to a new Qstar for the market. This higher market quantity is attributed to the increased number of firms operating, even though each firm's output returns to its initial level. This demonstrates that in the long run, firms in perfect competition will not sustain economic profits.