Chapter 23, Problem 9P

To determine

Two years ago, a large number of firms entered a market in which existing firms had been earning positive economic profits. By the end of last year, the typical firm in the industry had begun earning negative economic profits. No other events occurred in this market during the past two years.

1. Explain the adjustment process that occurred last year.
2. Predict what adjustments will take place in this market at the beginning of this year, when other things are equal.

Concept Introduction:

Positive economic profit: Positive economic profit occurs when the total revenue of the firm exceeds total costs. In a perfect competitive market, if the price is greater than the average total cost the firms, it 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.

Negative Economic profit: Negative economic profit is a situation in which the total cost of the firm exceeds the total revenue of the firm. In this situation, the firm experience losses that will force them to leave the market.