Question

The price of the typical MP3 player (such as the iPod) has been going down in the past 10 years. What could explain this consistent drop in the price of MP3 players? Use the model for the long-run competitive firm to illustrate your answer (hint: you need two diagrams here: one showing the LAC for the typical firm, and another showing the long -run supply curve for the industry.)

Answer 1

In the short term, the company can make supernormal gains or losses. The profits or losses in the short run lead to a change in price level.

Supernormal profits attract companies that lead new companies to enter the market. In this process when the consumer supply increases in the longer term, leading the market to strike a balance where SRAC (Short Run Average Cost) are equivalent to the LRAC (Long Run Average Cost) and LRMC (Long Run Marginal Cost)

It is represented by E1 where the plant operates with the best performance at the minimal long-run average cost that results in a long-term reduction in the price level.

There are no entry or exit of the company in the long term and all businesses make normal profit. In the diagram, a market equilibrium point is displayed at the P price level, when AR (Average Revenue) as well as MR (Marginal Revenue) are equal to AC (Average Cost) and MC (Marginal Costs).

The industry produces at price level P at minimum cost with maximum use of resources. There the total output costs are compensated by sales prices. The plants are running at their best and companies increase their income in this sector. For the best usage of capital in the long term, the price range for MP3 players declines in 10 years.

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