market equilibrium with low entry barriersSolutionThe two ma

market equilibrium with low entry barriers

Solution

The two market structures with low entry barriers are Perfect competition nd Monopolistic competition.

In perfect competition, each firm is a price taker and accept market price as their own price, therefore firm\'s demand curve is horizontal. Firms maximize profit (or minimize loss) at intersection of demnd (price) line and marginal cost (MC) curve. If the price is higher (lower) than average total cost (ATC), the firm makes economic profit (loss) in short run equilibrium. However, since entry (and exit) barriers are low, short run profit (loss) causes new firms to enter the market (existing firms to exit the market), leading to higher (lower) market supply and a fall (rise) in market price, until in long run market equilibrium, each firm earns zero economic profit (loss).

In monopolistic competition, each firm is a price setter, therefore firm\'s demand curve is downward sloping. Firms maximize profit (or minimize loss) at intersection of marginal revenue (MR) and marginal cost (MC) curve. If the price is higher (lower) than average total cost (ATC), the firm makes economic profit (loss) in short run equilibrium. However, since entry (and exit) barriers are low, short run profit (loss) causes new firms to enter the market (existing firms to exit the market), leading to higher (lower) market supply and a fall (rise) in demand for individual firm\'s output, until in long run market equilibrium, each firm earns zero economic profit (loss).