Question

Draw a graph showing a market and a perfectly competitive firm in long run equilibrium.

Answer 1

Answer: in long run ,firm have variable inputs and there is no fixed cost.in the long run, a firm can enter into the industry and can also leave the industry whenever they get lower return and incur losses. Thee is no compulsion for the firm to incur the losses, they can leave the industry.

When a firm is earing super normal profit other firms will attract the market . New firm will enter into the industry. Supply will increase leads to lower the price .Thus, profit will normalize .

This will show by figure.

In this figure, it shows the long run equilibrium in perfect competition. On x asos, it measured output and on y axis ,it measures price and cost

at price p0 LMC curve is cutting the AR0 curve at two points E and E0. At point E , it cuts from above but at point E0 , it cuts from below the AR0 curve .so AR0 is less than LAC .hence firm incur losses.

At price p3 AR2 is greater than LAC . Firms is enjoying super normal profit .

At price p1, cost is equal to revenue on M1 quantity. At equilibrium point E1 , firm in not earning either loss or super normal profit. Firm is in long equilibrium and fulfill the competitive market condition .