Analysis of Equilibrium in the Market - Essay Example

Consequently, with marginal revenue being equal to marginal cost, super-normal profits will be realized. In the long run, due to freedom of entry and exit from the industry, the surplus profits inform of the supernormal profits realized by the firms in the industry will attract new firms into the industry thus increasing the supply of the product (Chiappori and Ekeland 2006).

An increase in supply results to fall prices as explained by the law of supply. The fall in prices results in the individual firms facing a falling perfectly elastic demand curve consequently resulting in a reduction of the surplus profits. This will continue to the point where the firms will no longer be making surplus profits, realized when the firm is just covering its production costs as a result of the increase in the cost of milking equipment. During this time, no more firms will be attracted to the industry when the price is equal to the average cost while the demand curve is tangent to the average cost curve at the minimum point, a point when the firm is making normal profits.