Microeconomics · Unit 3: Production, Cost, and Perfect Competition · 14 min read · Updated 2026-05-11
Long-Run Supply in Perfect Competition — AP Microeconomics
AP Microeconomics · Unit 3: Production, Cost, and Perfect Competition · 14 min read
1. What is Long-Run Industry Supply?★★☆☆☆⏱ 3 min
Long-run supply describes the relationship between market price and total quantity supplied by all firms in a perfectly competitive industry after all possible adjustments: firms can freely enter or exit the market, all inputs are variable, and the number of firms in the industry is not fixed.
Unlike the short-run supply curve, which holds the number of firms fixed, long-run supply fully accounts for entry and exit that occurs when economic profits are non-zero, and reflects how input prices change as industry output expands or contracts. This topic appears in both multiple-choice and free-response sections of the AP Micro exam, often combined with short-run adjustment questions.
2. Constant-Cost Industries★★☆☆☆⏱ 3 min
When demand increases in a constant-cost industry, the short-run price rises above the original minimum average total cost ($\min ATC$), so existing firms earn positive economic profit. Positive profit attracts new entry, shifting the short-run market supply curve rightward. Since input prices do not change, $\min ATC$ remains constant for all firms. Entry continues until price falls back to the original $\min ATC$, where economic profit returns to zero.
The long-run industry supply curve for a constant-cost industry is horizontal at $P = \min ATC$, because any change in demand is fully accommodated by a change in the number of firms, with no change in long-run equilibrium price.
Exam tip: If a question does not specify a cost structure but tells you input prices are unchanged when the industry expands, it is a constant-cost industry, and the long-run price after any demand shift will equal the original long-run price.
3. Increasing-Cost Industries★★★☆☆⏱ 3 min
When demand increases, short-run price rises, firms earn positive profit, and new firms enter. New entry increases demand for scarce inputs, bidding up input prices for all firms. Higher input prices shift every firm's ATC curve upward, resulting in a higher new $\min ATC$. Entry stops when price rises to equal the new higher $\min ATC$, so the new long-run equilibrium price is higher than the original.
This positive relationship between industry output and long-run equilibrium price gives the long-run industry supply curve an upward slope. For a permanent decrease in demand, the opposite occurs: exit reduces output, lower input demand reduces input prices, $\min ATC$ falls, and the new long-run price is lower than the original.
Exam tip: On FRQ graph questions, your upward-sloping long-run supply curve must pass through both the original and new long-run equilibrium points after a demand shift to earn full credit; do not draw it arbitrarily.
4. Decreasing-Cost Industries★★★★☆⏱ 2 min
When demand for the final good increases, entry of new firms increases demand for inputs. Input producers can scale up their production and exploit their own economies of scale to reduce per-unit input costs, so input prices fall for all firms in the final good industry. Lower input prices shift every final good firm's ATC curve downward, leading to a lower new $\min ATC$.
The new long-run equilibrium price equals the lower $\min ATC$, so higher industry output leads to lower long-run price, giving the long-run industry supply curve a downward slope.
Exam tip: Decreasing-cost industries are rare on the AP exam, but always check for the clue that input prices fall as industry output expands to confirm the cost structure.
5. Long-Run Equilibrium Conditions★★★☆☆⏱ 3 min
Regardless of the industry cost structure, all perfectly competitive industries share the same three core conditions for long-run equilibrium:
All existing firms maximize profit, so $P = MR = MC$
No firm has incentive to enter or exit, which requires zero economic profit, so $P = \min ATC$
Total quantity supplied equals total quantity demanded in the market
P = MR = MC = \min(ATC)
This condition holds because any deviation from $P = \min ATC$ triggers entry or exit that pushes price back to this level. If $P > \min ATC$, positive profit attracts entry, increasing supply and pushing price down. If $P < \min ATC$, negative profit causes exit, reducing supply and pushing price up. Only when $P = \min ATC$ does entry/exit stop.
Exam tip: On FRQs that ask if a market is in long-run equilibrium, you must explicitly mention the zero-profit (no entry/exit) condition to earn full credit; forgetting this is a common point deduction.
Common Pitfalls
Why: Students memorize the constant-cost shape from common examples and incorrectly generalize it to all industries.
Why: Students mix up firm-level adjustments and market-level outcomes after entry/exit.
Why: Students confuse accounting profit with economic profit, and forget free entry eliminates all economic profit in the long run.
Why: Students assume any demand shift changes costs, but constant-cost means input prices do not change, so ATC stays fixed.
Why: Students confuse firm-level economies of scale with the industry-level definition of decreasing cost.
Why: Students stop at the short-run outcome and forget entry/exit adjusts the price back to $\min ATC$.