Question

Draw a diagram and explain how the perfectly competitive long-run demand curve for a firm is derived. On the same diagram draw a short run demand curve and explain the difference between the shape of the two curves

Answer 1

SHORT RUN EQUILIBRIUM OF INDUSTRY :: in industry is in equilibrium (in shod wn) when its total output remains there being no tendency to expand or contract its output of all in au in equilibinam industry is also in equilibulum, for full equilibrium of industry in shoot un, all flims must be caining only normal profils But toad eq. of industry locaus given the market demand & market supply, at that price which clear the met a wheee quantity demanded = quantity supplied MC, AC Il profit VI -- OUF Owparo i fumi) ( A2) Shett run industry equilibrium (tiga) LONG RUN EQUILIBRIUM OF FIRM: a ones. The firms are in equilibeum ( long run) when they have adjusted then plant so as to produce at the minimum polut of their long run AC which is taught to the demand cuve defined by the market price inc where I Pria Marginal cost = Muininan of Average cost Price = Average cost (normal) o The firms in long run will be earning just nomal profits which are included in LAC There is freedom of entry of new fems l exit of exis Hug stof they are excess profits new firms will be attracted in the indust this will lead to increase in supply and hence fall in pice lead and the cost of production will ruse due to more intensive come factors of production and These changes will continue until the LAC becomes tangent to the demand cure & firm enjoys normal profits. a similarly if the firms make loves in the long run, they will leave the industy price will rise e costs would fall Fill namal profits are been Jachieved eq. adjustment proces by entyd exit 4 finally only normal to Cs Scằnned with CamScanner

Adjustment to do SMG, SACI Cabuy - *. - - - - -- (Industry) Iust ll be shat um, . firm in long run alo faces a perfectly elastic demandeur it takes the market price as given in op Suppose the firm i working with the plant size with SAC, and SMC, and maximizing its profits in short wn at OQ, level of output at will have incentive to build new cabouty and move along LÁc. At the same time, new firma will be entering the indusry attracted by excess prefits ire as quantity supplied P & Prices & p costs ar ss shifts to s's' and price falls to op, at which firme ane in long run eq. So, firm adjusts at plant slze so as to which the LAC is the minimum possible foclou of production - Ate ,SMC - SAC = LAC LMC- produce that level of output at given the technology & puus of Long run eq. condition. under nomal ques of LR eq. ALITTER: (film) Line SMC (Industry -- SACL -1 → - > ยหง 4 ! (normal bagits) 'F at of coresponds to optimum size of the firm where it produus out lowest bossible possible cost. cost. It It also imples o also implies that resources are fully a the society and in a wo u ny Consumers au biu. goods at gera the lowest possible I the fully utilized getting : Scanned with CamScanner SA

LONG RUN EQUILIBRIUM IN INDUSTRY :: The industy is in equilibrium Iling and when a price is reached at which all funs au in equilibrium ele producing at the min of LAC cure and making just normal profits) And Then is no fruther entry or exit of firms in the industry, given the technology and factor prices The industry should produces the level of output at which quantity demanded ď supplied of its product an equal. Conditii !sa ast and ..x . P=LMc = Min. LAC = MR = SMC (firm maximises profits) SAC = LAC=P ( eeun just normal profits) - Fig*. 017 This has been shown in Scanned with CamScanner A long run allocativi eff. = P = MC pwductive , P- Min Ac n . D it is bicim)