A
Short run adjustments for markets and the firm to a decrease in consumer incomes are to be illustrated graphically.
Concept Introduction :
B
Long run adjustments to the drop in income are to be shown graphically.
Concept Introduction : Perfectly competitive firms are the ones with many firms producing same product in the market at a homogenous prices. The entry and exit in competitive market is free , the firms always face competition due to high substitutability of the products. Under perfect competition , long run equilibrium is when all factors of production are variable , new firms entering the market supply of firm’s increases reducing price per product. They need to ensure p> AVC to stay in the market so the loss making firm exit. Thus, firms enjoy market efficiency P=MR.
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