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The figure shows a firm which operates in a perfectly competitive industry.
At an initial market price of P1 the firm faces a demand curve shown by the horizontal
line AR1 = MR1. At the point where MR1 is equated to MC, AR is greater than AC. As such,
the firm earns abnormal profit which would encourage new firms to enter the industry.
This would occur in the long run which causes supply to increase and as a result the market
price falls. The price would continue to decline until firms in the industry earn just normal
profit. This happens at a price of P2 where the new
demand curve which the firm faces is shown by AR2 = MR2. At the point where MR2 is equated
to MC, AR is equal to AC. The firm therefore earns just normal profit
at this point.