B2.01.09: Perfect Competition in the Long Run

Question 1

Draw supernormal profit being made in the long run and explain what this change shows too

Answer 1

Industry Diagram:
- Supply curve shifts to the right and a new equilibrium is at a lower price P2 which extends to firm diagram
- This is because due to free entry/exit into the market, new firms enter this market as they are attracted by the supernormal profits they are missing out on.

Firm Diagram:
- P2 line is drawn horizontally and that is D2=AR2=MR2
- This shows that no supernormal profit is being made in the long run as all profits have been competed away as AR=MR=MC
- Normal profits can still be made in the long run

Question 2

Draw subnormal profit being made in the long run and explain what this change shows too

Answer 2

Industry Diagram:
- Supply curve shifts to the left and a new equilibrium is at at higher price P2 which extends to the firm diagram

Firm Diagram:
- P2 line is drawn horizontally and this is labelled D2=AR2=MR2
- AC Curve touches the D2=AR2=MR2 curve at lowest point
- This shows that no more subnormal profit is being made and that it wont last in the long run as firms will be incentivised to leave the market and produce their opportunity costs instead to make normal profits and there’s also no barriers to entry / exit hence, it’s costless for them to leave the market.

Question 3

Define long run

Answer 3

All FOP and costs are variable

Question 4

Define short run

Answer 4

At least one FOP is fixed