Lecture 12

In the long run, the price becomes equal to the minimum of the average total cost (across firms).
As a result, at the end, firms that remain in the market must be making zero economic profit. Firms stop entering/exiting the market only when price and the average total cost are forced to become equal. They are then operating at efficient scale.
This makes sense because the opportunity costs which are taken into account cover other things. The economic profit is zero, not the accounting profit!
In the short run, an increase in demand raises price and quantity supplied (and they make positive economic profit). The resulting influx of firms would force the cost back down, which again results in the long run average total cost being stationary.

While a competitive firm is a price taker, a monopoly firm is a price maker.
A firm is considered a monopoly if it is the sole seller of its product and its product does not have any close substitutes. Monopolies arise when there is a barrier to entry such as

• Ownership of a key resource.
• Government regulation - the government gives a single firm the exclusive right to produce some good.
• The production process - A single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. Costs of production make a single producer more efficient than a large number of producers. In this case, the industry is said to be a natural monopoly. Consider the railways in India.