Economics – Different market structures | e-Consult

In the short run, the firm operates where marginal cost (MC) equals marginal revenue (MR). This determines the quantity produced. The price is then determined by the demand curve at that quantity. In this case, the firm is selling 100 units at a price of £20.

However, in the long run, the entry of new firms shifts the demand curve faced by the existing firm to the left (it becomes less steep). This is because consumers have more choices. As a result, the firm must lower its price to sell the same quantity. The firm will continue to reduce its price until it reaches the point where marginal cost (MC) equals marginal revenue (MR) *again*. This is the long-run equilibrium.

The key reason for the price and quantity changes is the entry of new firms. This increases competition, reduces the demand for the individual firm's product, and forces the firm to lower its price and reduce its output. In the long run, economic profits are driven to zero due to the increased competition.