Question

Graph a firm earning profits>0. Label and note the four corners of the rectangles for revenue,

            cost and profit. What is the long-run adjustment for the market in this case?

Answer 1

In the above case the equilibrium is determined at P=MC. The firm's costs are less than the price determined by the cost and price curves. The profits are shaded in green.

In the long run new firms will enter the market attracted by positive economic profits. The supply curve will shift to the right and price will fall and continue to fall till it becomes equal to the average total costs.