Draw graphs showing a perfectly competitive firm and industr

Draw graphs showing a perfectly competitive firm and industry in long-run equilibrium.
A. How do you know that the industry is in long run equilibrium?
B. Suppose that there is an increase in demand for this product. Show and explain the short-run adjustment process for both the firm and the industry.
C. Show and explain the long-run adjustment process for both the firm and the industry. What will happen to the number of firms in the new long-run equilibrium?

Solution

A. Perfectly competitive market:

Long-run equilibrium:

The firm will be in the long-run equilibrium where MC = minimum ATC = MR. There is no incentive for other firms to enter the market and the firm is breaking even.

B.

C. The graph below shows the long run adjustment process for both firm and industry.

The LRAC is the long run average cost curve which is a bundle of numerous short-run average cost curves. The LRMC is the long-run marginal cost curve. This indicates that changes in total cost resulting from change in production when all inputs, including capital and plant size, are variable.

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