The diagram below represents the long run equilibrium of a firm in Perfect Competition - Leaving Cert Economics - Question 9 - 2017
Question 9
The diagram below represents the long run equilibrium of a firm in Perfect Competition.
(i) Write in words the full label (not abbreviations) for each of the lines ... show full transcript
Worked Solution & Example Answer:The diagram below represents the long run equilibrium of a firm in Perfect Competition - Leaving Cert Economics - Question 9 - 2017
Step 1
1. Marginal Cost
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Answer
The Marginal Cost curve represents the additional cost incurred from producing one more unit of output.
Step 2
2. Average Cost
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Answer
The Average Cost curve shows the average cost of production for all units produced. It is derived by dividing total cost by the quantity produced.
Step 3
3. Average revenue / demand
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Answer
The Average Revenue curve represents the revenue earned per unit sold, which, in a perfectly competitive market, is equal to the price.
Step 4
(ii) Is the firm earning supernormal profit?
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Answer
No, the firm is not earning supernormal profit. This conclusion can be drawn as the Average Revenue (AR) curve is equal to the Average Cost (AC) curve at the equilibrium output. Consequently, since AR = AC, there is no excess profit, thereby indicating that the firm is only earning normal profits.
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