In a perfectly (or purely) competitive industry, all firms have the same costs.

Question

In a perfectly (or purely) competitive industry, all firms have the same costs. All firms have a minimum average total cost of $100 at a quantity of 200 and a minimum average variable cost of S46 at a quantity of 100. Initially, the industry is in long run equilibrium. At the long run equilibrium, the price is: Suppose that the demand for the product decreases. Rank the events below in the order that each occurs after demand decreases until price returns to long run equilibrium. Note, not all of the events need be placed.... until the market reaches the long run equilibrium price.

Explanation / Answer

The long-run equilibrium point for a firm in this market is the one where P =minimum LRATC = LRMC which implies that there is no economic profit in the long-run. A typical firm sells 200 units at a price of $100 per units.

Assume that there is a decrease in the demand. The demand curve shifts to the left, decreasing the price and quantity demanded and supplied in the short-run.

For a firm, this implies a lower price and unchanged ATC. Firms anticipate a lower price and hence find themselves operating at a loss. In the long-run, few firms exit the industry, decreasing the supply.

With this, the supply curve shifts to the left, reducing the quantity and raising the price to its original level. In the long-run, the leftover firms will be producing the same quantity as they were producing before.

Hence the ranking is:

Untill the market reaches the original long run equilibrium at price $100 per unit

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