Question

You decide to grow organic hay and sell directly to the consumer. Production costs will increase...

You decide to grow organic hay and sell directly to the consumer. Production costs will increase but you are confident that you will make more profit in the short run nonetheless. Can you explain this in terms of market structure? Draw a graph as part of your answer. In the long run, what profit can you expect? Why?

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Answer #1

We might imagine that such a firm would be competing in a perfectly competitive market or in the monopolistically competitive market.

Further, firm is making the profits over the short run, thus, it would attract the new firms over the long run.

Over the long run run, entry of new firm would reduce the profit to the zero level.

Following is the diagram:

In the above diagram panel (a), the firm is making profit since the P >AC. While in the second panel (b), the P = AC, thus firm is making only normal profit.

Abnormal profit in the short run attracts the new firms. and profit withers away.

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