FIGURE 10 LONG-RUN ADJUSTMENT WITH SHORT-RUN LOSSES
Panel A shows a market initially in equilibrium at point a. Industry supply and demand equal S0 and D0, and equilibrium price is P0. This equilibrium leads to the short-run economic losses shown in the shaded area in panel B, thus inducing some firms to exit the industry. Industry output contracts to QL in panel A, raising prices to PL and expanding output for the individual firms remaining in the industry, as the industry moves to long-run equilibrium at point b. Again, in the long run, firms in perfectly competitive markets will earn normal profits, as shown by point b in panel B.