![]() The price of the good equals both the firm's average revenue and its marginal revenue. Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces.The only long-lasting effect is that industry output is Q, a higher 1 3 level than originally. The new equilibrium reduces the 3 price back to P, "bringing an end to high prices and manufacturers' prosperity", since now firms 1 produce q and earn zero profit again. Their entry, "an expansion in an industry", leads the supply curve to shift to S. ![]() However, the positive profits that firms earn encourage other firms to enter the industry. With 2 the higher price, the typical firm increases its output from q to q, and now makes positive profits, 1 2 since price exceeds average total cost. It 2 also causes the industry to increase output to Q. This causes "strong 2 prices" in the industry, as the price rises to P. Now suppose an increase in demand occurs, with the demand curve shifting to D. Since price 1 equals average total cost at that point, the firm makes zero economic profit. At this point, the typical firm produces output q. The industry produces output Q1, where supply curve S1 intersects demand curve D1, and the price is P1. In the figure, the industry i originally in long-run equilibrium. The figure below shows that although high prices cause an industry to expand, entry into the industry eventually returns prices to the point of minimum average total cost.
0 Comments
Leave a Reply.AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |