Three Possibilities - and Average Cost (AR -AC) condition....

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Three Possibilities: In a competitive market, price is fixed and given for an individual firm. Moreover, every firm should earn only normal profits as included in its Average Cost of production. However, in the short run, different firms may have a varying degree of efficiency. Their cost structures may differ. More efficient firms may temporarily earn extra or Super Normal profits. Less efficient firms may earn Sub Normal profits (losses) and only optimum efficiency firms will earn normal profits. This is because of the fact that though equilibrium of a firm depends upon the MR = MC condition, its profits depend upon the difference between firms Average Revenue (Price)
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Unformatted text preview: and Average Cost (AR -AC) condition. This leaves us with three possibilities. In an equilibrium with MR = MC, either i) AR > AC = Super Normal profits ii) AR < AC = Sub Normal profits, and iii) AR = AC = Normal profits. In the long run the presence of Super Normal profits will attract new firms. As new firms enter the market extra profits will be competed away . Similarly inefficient firms with higher costs will start exiting in search of some other opportunity. In the long run, after all adjustments are over only normal profits will be earned by all the firms. In that case not only the MR = MC but the AR = AC condition will also be satisfied by all firms....
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Three Possibilities - and Average Cost (AR -AC) condition....

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