Chapter 9 - Long-run equilibrium

Chapter 9 Video Lecture
Managerial Economics: A Problem Solving Approach
by Luke Froeb, Brian McCann

Summary of Main Points Chapter 9

-- A competitive firm can earn positive or negative profit in the short run until entry or exit occurs. In the long run, competitive firms are condemned to earn only an average rate of return.

-- Profit exhibits what is called mean reversion, or "regression toward the mean."

-- If an asset is mobile, then in equilibrium the asset will be indifferent about where it is used (i.e., it will make the same profit no matter where it goes). This implies that unattractive jobs will pay compensating wage differentials, and risky investments will pay compensating risk differentials (or a risk premium).

-- The difference between stock returns and bond yields is a compensating risk premium. When risk premia become too small, some investors view this as a time to get out of risky assets because the market may be ignoring risk in pursuit of higher returns.

-- Monopoly firms can earn positive profit for a longer period of time than competitive firms, but entry and imitation eventually erode their profit as well.

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