Question

Take a look at the panel (b) of Figure 25-1, and assume that it initially applies to a typical firm in a monopolistically competitive industry. Explain how it might be possible for this firm temporarily to find itself in a situation such as that depicted in panel (a) during the process of adjustment from panel (b) to a final long-run equilibrium as shown in panel (c).

Short answer

In panel (b), the firm is in short run harmony where MR=MC.

In panel (a) the misfortune gets recuperated and at one point the firm starts acquiring supernormal benefits demonstrated by the blue region.

In panel (c) The cycle will go on till every one of the organizations arrive where P=MR=MC=ATC

Step-by-step solution

Introduction

Monopolistic competition happens when an industry has many firms offering items that are comparative but not indistinguishable. Not at all like syndication, these organizations have little ability to reduce supply or raise costs to increment benefits

Explanation Part (1)

In panel (b), the firm is in short-run harmony where MR=MC. Balance cost and not entirely set in stone from the comparison focuses on the demand curve. In the short run, the firm is causing misfortunes as demonstrated by the red region.

In panel (a) Disturbed by the short-run misfortune, firms start to leave the business over the long haul and the demand looked by each firm gazes upward relating to each cost level, pushing the demand curve upwards. Accordingly, the misfortune gets recuperated and at one point the firm starts procuring supernormal benefits demonstrated by the blue region.

Explanation Part (2)

In panel (c) Because of supernormal benefits, a few firms will again enter the business and again the demand looked by each current firm will go down, steadily moving the demand curve downwards. The cycle will go on till every one of the organizations arrives where P=MR=MC=ATC. Very ordinary benefits will be cleared out and each firm will procure a typical benefit.