Using a graph, show a short-run equilibrium for the industry and the firm. Explain the graph.

What will be an ideal response?


In the above figure, the industry demand and supply curves intersect vertically above Q, where Q is quantity produced and sold at price P. The firm takes P as given, and chooses to produce q units since this is where MR = MC. Average revenue at q is aq and average total cost is bq, so average profit is ab and total profit is Pabc.