Question

1. Diagram a purely (product market) competitive firm in long-run equilibrium. Be sure to show both the market and the representative firm. Next, on the same diagram, show what happens to the market and the representative firm if the market demand for the product falls dramatically, for instance, due to bad press. Briefly explain your conclusions.

Please show me your thought process. Please explain it as if you are telling it to someone who has no clue about economics.

Answer 1

Ans) In Perfectly competitive market, price is equal to marginal revenue for an individual firm. P = MR.

Further, a profit maximising firm produces the quantity where MR and MC curve intersect i.e are equal.

In long run, a Perfectly competitive firm always earn zero economic profit and price is equal to minimum of ATC.

Now, when demand decreases, demand curve will shift to the left and price will decrease.

For a competitive firm, price will now come below ATC and firms will earn negative economic profit.

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Extra÷÷

In long run, some firms will exit the market and price will increase till it again reaches to the minimum of ATC and firms will again earn zero economic profit.