[lost_in_translatio]

Hi guys,

Please can you help me with this. I have no idea what diagram to draw. I only know the diagram for a monopolist.

"Draw one fully labelled diagram depicting the long-run profit maximising equilibrium of a perfectly competitive firm, and explain how much profit is made in the long-run."

I really appreciate it! Thanks in advance.

[MagicNMedicine]

Draw one with a horizontal demand curve (as its perfect competition, the firm has to accept the market price it isn't downward sloping dependent on quality like a monopolist). The horizontal demand curve gives the price.

Do an upward sloping marginal cost curve, and the points at which the lines cross (P = MC) will be where the firm produces in terms of price and quantity.

Now you can think of the average total cost curve which will be U shaped. If the point where P = MC is above the ATC curve then the firm is making a profit because total revenue (P x Q) is bigger than total cost (ATC x Q). In this situation new firms will be attracted into the market and this will push the price down so the demand curve will drop down. In the long run the price will be driven down to the point where the demand curve intersects the marginal cost curve at the lowest point on the ATC curve, so total revenue = total cost, the firm makes zero profits.

Remember in a perfectly competitive market all the firms are identical.

[lost_in_translatio]

Thanks for getting back to me. Please could you take a look at the attempt of my graph? (I've attached it to this post) I'd be very grateful! I can't seem to find the diagram anywhere in my book.

[slappyhours]

hey buddy,

great attempt at the graph. in a perfectly competitive market however, we only use one marginal cost (MC) curve to keep things simple. so don't worry about drawing more than one. otherwise you're correct in terms of the demand curve (which also equals average revenue and marginal revenue in a perfectly competitive market) moving downward, which stems from an influx of firms attracted by supernormal profits, increasing supply).

here's a good example showing what happens in the market and to the firm itself:



to start with in the short run, firms producing where MC=MR, setting a price of P1 and producing at Q1. note how the demand curve to higher than the total long run average cost curve. this would indicate the firm is earning short-run supernormal profit which, although not highlighted, would be the area P1, A, reading down to the segment where you reach the LRAC curve, where you read back across to the y axis.

firms see this as an incentive to enter the market, pushing supply down in the long run (S1 -> S2) in the market diagram. this simultaneously pushes down the demand curve (D1 -> D2). as you can see, firms produce again where MC=MR, which just happens to be at the lowest point of the AC curve. here, only normal profit is made in the long run and firms stop entering the market.

in long run perfect competition, firms are both allocatively efficient (P=MC) and productively efficient (where firms produce at the lowest average cost point on their LRAC curve).

[MagicNMedicine]

yes I agree with slappy hours, you are on the right lines but drawing it the way slappy hours has done with two diagrams is better IMO

[lost_in_translatio]

Hi, thanks for getting back to me I really appreciate the help and I'm getting a new book soon! (Can't wait!)

Would I mark that whole area between MR1 and MR2 as profit or just that little triangle between A, B and MR1/MR2?

Thanks again

[slappyhours]

iirc (and anyone pls feel free to correct me)



P1 -> A -> read down to where it intersects the LRAC curve -> AC1

[MagicNMedicine]

Yes slappyhours is right

Think of it by reading off the graph to tell you the information -

When you produce at P1Q1, then the total revenue you are bringing in is P1 x Q1, the total cost you are paying is AC1 (on slappyhours graph) x Q1. So the profit is (P1 - AC1) x Q1.

When you produce at P2Q2, the total revenue is P2 x Q2, and the total cost is P2 x Q2 as P2 is also the level of the average total cost, so profit is 0.

[lost_in_translatio]

Thanks guys