Question

Draw the four cases of perfectly competitive outcomes in the short run. Label everything including price, total revenue, marginal revenue, total cost, variable cost, and profit/loss.

Answer 1

In figure 1, the equilibrium occurs at P=MC=ATC. This is the point where the firm earns normal profits. when the firm earns normal profits no exit or entry takes place in the market.

In figure 2, the equilibrium occurs at P=MC<ATC<AVC. This is the point where the firm earns losses and even unable to cover variable costs. The firm will shut down operations.

In figure 3, the equilibrium occurs at P=MC>ATC. This is the point where the firm earns positive economic profits. when the firm earns positive economic profits entry of new firms take place in the market in the long run.

In figure 4, the equilibrium occurs at P=MC<ATC but is able to cover variable costs. The firm will continue operations despite suffering losses.. This is the point where the firm losses, when the firm earns losses there will be exit of the firms from the market.