Question

Determine the equilibrium of a firm in the short period.

Answer 1

In the short period, a firm is in equilibrium when it chooses the level of output at which it maximises profit or minimises loss. This occurs where Marginal Revenue (MR) equals Marginal Cost (MC).

At this point:

• If Average Revenue (AR) > Average Cost (AC), the firm earns supernormal profit.
• If AR = AC, the firm earns normal profit.
• If AR < AC, the firm incurs a loss but may continue operating if it covers its Average Variable Cost (AVC).

Therefore, the short-period equilibrium of a firm is determined by the condition MR = MC, and the profit or loss depends on the position of the AR and AC curves at that output level.