Question

Consider Figure 23-8. Why does the output rate in panel (b) remain at$q_e$ units per hour even if the position of the AC curve shifts from $A{C}_1$to$A{C}_3$following an increase in fixed costs, and how do we know that economic profits then become negative?

Short answer

Economic profits then become negative when the average cost curve will be above the demand curve of the firm.

Step-by-step solution

Introduction

A represents the demand and supply of the market.

B represents the demand and supply of an individual firm.

Assuming that the individual firm builds the cost and accordingly the amount provided, nobody will purchase the result of the individual firm on the grounds that the expanded cost is well over the balance market cost. Consequently, the individual firm won't be prepared to expand the output.

Explanation

A negative economic profit is a situation in which the total cost of the firm exceeds the total revenue of the firm. In this situation, the firm experiences losses that will force them to leave the market. In a perfectly competitive market, if the price is greater than the average total cost; the firms will get a positive economic profit. If it is below the average total cost curve, the firm will incur losses and if the price was equal to the average total cost curve, it is called the breakeven point.

Hence, the economic profits then become negative when the average cost curve will be above the demand curve of the firm.