Chapter 23, Problem 8P

To determine

A perfectly competitive industry is initially in a short run equilibrium in which all firms are earning zero economic profits but in which firms are operating below their minimum efficient scale. Explain the long run adjustments that will take place for the industry to attain long run equilibrium with firms operating at their minimum efficient scale.

Concept Introduction:

Zero economic profit: Zero economic profit is a situation in which e total revenue equals total cost. The zero economic profit is also called the normal profit.

Economic profit: The economic profit of a firm is calculated by deducting total revenue from total cost. The total costs consists of both implicit and explicit costs. Explicit cost is the ordinary cost of the firm like rent, salaries to the employees etc. On the other hand, implicit cost also known as imputed cost describes as the opportunity cost of anything. In a perfect 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. If the price was equal to the average total cost curve it is called the breakeven point.