Equilibrium Price and Quantity in Perfect Competition
The perfectly competitive firm takes the equilibrium price
set by the market and maximizes profit by producing where price, which also
equals marginal revenue, is equal to marginal cost. The level of profit earned
depends on the relationship between price and average total cost. Graph the
perfectly competive industry of market. Graph the perfectly competitive
individual firm. Note that the perfectly competitive market is initially in
long-run equilibrium with price equal to P1. Assume now that there is an
increase in demand for the good produced in this market. Draw a new market
demand curve that illustrates this change and lable it D2. Also, draw the new
demand curve for the firm and lable it MR2=D2. Is the firm now making economic
profit? Given the change in demand described, over time what will happen to the
number of firms the industry? As this change takes place, what will happen to
the industry supply curve? Draw the new industry supply curve that is
consistent with long-run equilibrium in the market and lable it S2. After the
market has once again adjusted to long-run equilibrium, market price is (what
?) and economic profit for the firm is equal to (what ?)
