Question

Take a look at the panel (a) 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 (b) during the process of adjustment from panel (a) to a final long-run equilibrium as shown in panel (c).

Short answer

In panel (a), the firm is in short-run harmony, where MR=MC. In panel (b) attraction by the short-run benefit, firms start to enter the business over the long haul. In panel (c) because of misfortunes, a few firms will leave the business

Step-by-step solution

Introduction

In panel (a), the firm is in short-run harmony, where MR=MC. Balance cost and amount in stone from the comparison focuses on the demand curve. In the short run, the firm is acquiring very typical benefits as demonstrated by the blue region.

Explanation

In panel (b) attraction by the short-run benefit, firms start to enter the business over the long haul and the demand looked at by each firm decays compared to each cost level, pushing the demand curve downwards. Thus, the benefit decreases and at one guide the firm starts to cause misfortunes. In panel (c) because of misfortunes, a few firms will leave the business and again the demand looked by each current firm will look into, steadily moving the demand curve upwards. The cycle will go on till every one of the organizations arrives at a point, where P=MR=MC=ATC. Very typical benefits will be cleared out and each firm will procure an ordinary benefit.