UN cea LESSON 3 M ACTIVITY 31 Key Graphing Perfect Competition ‘The following firms or industries are all operating in a perfectly competitive market. (A) Illustrate each situation on the graph provided. (B) Label all curves in your (C) Explain the reasoning for your graphs in each situation, 1. A firm experiencing economic profit in the short run. EB Figure 31.1 Short-Run Economic Profit Industry Firm s s Sg Me ATC = E P=MR ‘AVC D ‘ QUANTITY: QUANTITY: Explanation: The firm will maximize profits where MR = MC and will enjoy profits because price is ‘above its ATC curve. 176 eeAnswer LESSON 3 M ACTIVITY 31 Key 2. A firm operating with an economic loss in the short run. Figure 31.2 Short-Run Economic Loss Industry Firm s wl 2 g z E| D ‘QUANTITY Explanation: The firm will minimize losses where MR = MC. At this level of output, the firm is cov- ering all ofits variable costs and a portion of its fixed costs. In this example, the firm will minimize its losses in the short run by continuing to produce because price is above its AVC curve. 3. A firm in a classic shut-down position in the short run. EB igure 313 Classic Shutdown Position Industry Firm Mc 3 aI ATC z| © &| D ‘QUANTITY ‘QUANTITY Explanatioi the AVC curve, and the firm will minimize its losses by closing down. However, it will still experience fixed costs. ‘ec Pet Hoi che HewueManial © Creal fr on main New ik NX 17‘Answer LESSON 3 M ACTIVITY 31 Key 4, Long-run equilibrium for a firm and industry Figure 31.4 Long-Run Equilibrium Industry Firm s ATC 3 8 we e z a a P=MR D QUANTITY (QUANTITY Explanation: The firm will long-run equilibrium where MC = minimum ATC = MR. The firm is breaking even; there is no incentive for other firms to enter the market. 5. Illustrate how economic profits will disappear in the long run. Figure 31.5 From Short-Run Profit to Long-Run Equilbrium Industry s 8 Mc z eee P=MR P,=MR, 5 D ‘QUANTITY ‘This will shift the supply curve to the right, causing prices to drop and eliminating profits. The firm Explanation: eno i ep aa hr ‘will then be in long-run equi sm at the break-even point. 178 ‘ml Mas acne ta a 9 aa rane ion Rov oHro 6. Illustrate how economic ES rigure3i.6 LESSON 3 m ACTIVITY 31 losses will disappear in the long run. From Short-Run Losses to Long-Run Equilbrium Industry PRICE QUANTITY QUANTITY Key Explanation: pei industry cannot continue to operate at a loss in the long run. There- will exit the industry first, thus shifting the industry supply curve to rms that survive will move to their break-even long-run equilibrium. fore, the least-efficient fis the left and raising price, ‘Aen Pacement Eeonomis cher Renae Mam © Conner zon action NewYork. 179