WorkshopExercise 2 Please submit to the Learning and Teaching Hub by 11.59 pm on Tuesday 13th December 1. Assume that the gold-mining industry is competitive. a) Illustrate and explain a long-run equilibrium using diagrams for the gold market and for the representative gold mine. Prepare your diagrams with the help of a software of your choice. [max 300 words, 15%]
When a market is competitive, as in thiscase the gold-mining industry, the firms operating in it are price takers, and they can freely enter or exit this market. The fact that they can do so has powerful implications in the long-term equilibrium of the market. Decisions about entry and exit depend on the incentives facing the owners of the existing firms, so if markets are already profitable, new firms will have an incentive to enterthe market, this will expand the number of firms and therefore increase the quantity of the good supplied causing the prices and the profit to go down. On the other hand if firms are making losses some of them will exit the market, reducing the number of firms and decreasing the quantity supplied and as a result driving up prices and profits. This process of entry and exit makes the market remainin zero economic profit, as the only way of ending it, is when Price and (ATC) are driven to equality.
The gold market long-run equilibrium represented below shows how demand D1 and supply S1 are in equilibrium when their intersection meets with P1. P1 is where there is zero economic profit and firms have their price P1 is equal to ATC. Graph Free entry and exit firms require an operation attheir efficient scale, which means both marginal cost (MC) and (ATC) most be equal to each other, and they are equal only when the firm is operating at the minimum of (ATC), which is consistent with zero profit. The gold market long- run equilibrium graph looks like this:
Grafica In this equilibrium A, the firm makes zero profit, as the price equals the MC so the firm is profit-maximizing, pricealso equals ATC, so the profits are zero.
Here there are no incentives either to leave or to enter the market. The longrun market supply curve is horizontal at this price as the gold-mining industry is a competitive market, and there fore price takers. This also shows us that eventually the number of firms in the market adjust so that price equals the minimum of average total cost and there areenough firms to satisfy all the demand at this price. The representative gold mine with the firm earning zero profit the marginal cost is equals to ATC and same to the price that is the same as MR. The long-run equilibrium of a competitive firm consists In a competitive market the price of the good equals both the firms average revenue and its marginal revenue. Profits are driven to zero in thelong-run, in this long run equilibrium all firms produce at the efficient scale, price equals the minimum of average total cost and the number of firms adjust to satisfy the quantity demanded at this price.
The competitive firms long run supply curve is the portion of its marginal-cost curve that lies above the average total cost. Profit= TR – TC PRICE ISABOVE AVERAGE TOTAL COST THE FIRM HAS POSITIVE PROFIT. Profit= ( P – ATC) × Q Zero profit is the price of the good equals the average total cost of producing that good. If the price is above average total cost, profit is positive which encourages new firms to enter.
Firm maximizes profits by choosing a quantity which price equals marginal cost. Free entry and exit force price to equal average...