Question

Suppose five years from now that the ranching industry is in long-run equilibrium at 70 cents per pound.

Graphically illustrate what that would look like for the ranching industry using side-by-side industry and firm graphs.

Answer 1

In long-run equilibrium, market demand equals market supply and for the firm, market price, Marginal cost (MC) and Average total cost (ATC) are equal. Therefore, firm demand curve (Market price) intersects MC & ATC at the lowest point of ATC. Since price equals ATC, each firm earns zero economic profit in long run.

In following graph, the left panel shows the market long run equilibrium where market demand curve D0 intersects market supply curve S0 at point A with long run equilibrium price P0 and market output Q0. In the right panel, Firm accepts P0 as its own price and equates its marginal cost (MC) with P0, while ATC equals MC at lowest point of ATC at point B, with firm output q0.