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Economic profits and industry dynamics - Entry exit of firms

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5a. Determine whether the typical firms depicted below are earning profits or losses then show graphically how economic forces will cause the industry to move to a zero economic profit for the typical firm. Be sure your graph indicates whether firms will enter or leave the industry and shows how the equilibrium industry price and quantity are changed.

In parts b through e below, answer in writing what you answered graphically above. Answers that address two or more possibilities will receive half credit if both answers are correct.

b) In the above graph, do new firms enter the industry or do existing firms leave the industry? What causes them to do so?

c) As the number of firms in the industry changes what happens to the industry supply curve? Why?

d) As the industry supply curve shifts, what happens to the price?

e) As the price changes, what happens to the profit or loss situation in the industry?

6 Complete the graphs below:

a) Draw the line representing the profit-maximizing level of output, q*.

b) Label ATC at output level q*.

c) Draw and shade in, the profit or loss rectangle.

d) Label rectangles "profit" or "loss" or "Zero Economic Profit."

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This post helps students to understand the concept of economic profits and industry dynamics. The students will be able to determine whether firms will enter or exit a particular industry.

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5a. Determine whether the typical firms depicted below are earning profits or losses then show graphically how economic forces will cause the industry to move to a zero economic profit for the typical firm. Be sure your graph indicates whether firms will enter or leave the industry and shows how the equilibrium industry price and quantity are changed.

In a competitive industry the equilibrium is achieved at P=MC. At this price currently, ATC < P which means that the ...

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