Question

Google search images and find the graphs for a perfectly competitive firm.

To earn full credit your graphs must include the following specific graphs:

1. Find the graph for short run economic loss for the firm.
2. Find the graph for short run economic profit for the firm.
3. Find the graph for long run – normal profit for the firm.
4. Make sure the graphs show the area of economic profit or loss.

Answer 1

( a ) The graph below shows short-run economic loss for the firm. The prevailing market price is such that the price line or average and marginal revenue curve lies below average cost throughout. The firm is making losses, since average revenue ( or price ) which is equal to M'E' is less than average cost which is equal to M'F'. The firm tries to minimise losses under the given price - cost situation.

As a result of losses the firms will have tendency to quit the industry in order to make a search for earning at least normal profits elsewhere.

( b ) The graph below shows a firm in the short - run equilibrium with economic profit.

In such market condition increased number of firms will have tendency to enter the market as well as increase their production to reap higher economic profits.

( c ) The graph below shows long run equilibrium of the firm earning normal economic profits.

In the long run firms will adjust according to the market consition and those making economic losses will exit the market, and those firms making economic profits will enter the market, however, in the long run, firms will only be able to make normal or zero economic profits.