Short-Run vs Long-Run Equilibrium in Perfectly Competitive Markets
Firms in a perfectly competitive market are earning _______________ profits at price P1. At this price individual firms will be faced with a _____________price elastic demand curve AR1=MR1. Given that firms are profit maximisers (MR1=MC), they will each be producing ________output at price P1, thus making supernormal profit (AR1>AC).
* Missing words: supernormal, Q1, perfectly
The prospect of earning profit will encourage the _________ of new firms into the market driven by the profit motive. Firms can do this easily and without cost because there are no ____________ to entry in the long run. This will cause a rightward __________in the market supply curve from S1 to _____. Ceteris paribus, this forces down the ruling market price from P1 to P2. As a result, the market price that individual firms can obtain _______________ because their perfectly price elastic demand curves fall from AR1=MR1 to ____________.
* Missing words: shift, decreases, AR2=MR2, barriers, entry, S2
As can be seen in the diagram, the new market equilibrium price P2 equals the average cost of production for firms. These firms are still profit-maximising (MR=MC) but are now only earning _________ profit (AR=AC). In effect, the supernormal profit has been _____________away by the entry of new firms into the industry. Ceteris paribus, there will be no further _____________ for movement of firms in and out of the industry, thus a long-run _________________ has been established where price _____ = average cost AC2 at output _________ where MR2=MC2.
* Missing words: incentive, P2, normal, competed, Q2, equilibrium
The diagram also shows that at the long-run equilibrium price of P2 and output Q2, perfectly competitive firms are both ________________efficient (AC=MC) and _____________efficient (P2=MC). In effect, firms are producing the ______________ profit-maximising output possible at the ___________-price which consumers are _____________ and __________ to pay.
* Missing words: allocatively, maximum, willing, cheapest, productively, able