short run supernormal profit in perfect competition

Question 1

short run supernormal profit in perfect competition

Answer 1

the profit maximising firm uses the condition MC=MR to determine the profit maximising level of output Q. At Q quantity of output the firm faces average total cost of C and earns average revenue P making a supernormal profit of Pabc. The perfectly competitive firm is able to make supernormal profit in the short run run as firms cannot exit or enter the industry in the short run despite there being no barriers to entry

Question 2

Long run normal profit in p[erfect competition impfect markets

Answer 2

The market is initially in qulibrum where Q quantity of Wheat is bought and sold at price P. Firm in perfect competition are price takers take the price P set by the market as they have no price setting power, giving teh demand curve D=AR=MR.

The profit maximising firm uses the MC=MR to determine the profit maximising level of output q where they are make supernormal

this acts as an incentive for firms to enter the market who are able to do so because there are no berries to entry in perfect competition

Question 3

Long run normal profit in p[erfect competition supply and demand

Answer 3

Firms entering the market shifts the supply curve right from s to S1 the market is now in equilbrum where d=s1 and Q1 quantity is bought and sold at the lower price P1. As a result D=AR=MR shorts down D1 = AR1 =MR1 with firms now taking the price P1. FIRMS NOW USE CONDITION MC=MR1 to define the profit maximising level of output q1. At this lower level of output the firm faces average total cost of C1 and earns average revenue P1. Given that P1=C1 the firm therefore makes normal profit. This is a long run equilbrum as there is no incentive for firms to enter or leave the market

Question 4

Natural monopoly answer

Answer 4

A natural monopoly is an industry that experiences economics of scale so large that it is only able to support one firm. In this example the train company experiences very large economics of scale as it must invest in train tracks and stations.

Initially when there is only one firm in the industry the firm can make abnormal profit at any level of production from Q1-Q2. If a competitor enter the industry, it would have to build another set of train tracks and stations which is likely to result in a significant number of consumers switching to the new service shifting D=AR left D1 = AR1.

With this level of demand the train company will make a loss at every level of output which us also the case for the competitor

As a result one of teh companies will leave the industry. Knowing this it is unlikely that any competitor will enter the industry

Question 5

Normal profit in monopolistic completion answer

Answer 5

The profit maximising firm uses the condition MC=MR to determine teh profit maximising levy of output Q. At Q the firm faces average total cost of C and earns average revenue P given that P=C, the form therefore makes normal profit. It does so because they’re no barrier to entry in monopolistic competition.

If firms make an abnormal profit in the short run competitors will enter the industry reducing demand for the original firms goods and thereby reducing its average revenue to the point where it makes normal profit the same is true vice versa for firms making a loss in teh short run