Under perfect competition, the price is determined by the market forces of demand and supply. The price line represents the market price at which the firm can sell its product. The average cost curve represents the average cost of producing the product at different levels of output.

If the price line lies below the average cost curve, it means that the market price is lower than the average cost of producing the product. In this situation, the firm would incur losses because it would be selling its product at a price that is lower than the cost of producing it.

Explanation:

If the price line lies below the average cost curve, the firm would face the following situation:

1. Marginal revenue (MR) is less than the average cost (AC): Since the price is lower than the average cost, the marginal revenue earned by the firm from selling an additional unit of output would also be lower than the average cost of producing that unit. Therefore, the firm would be making a loss on every unit of output sold.

2. The firm would not be able to cover its fixed costs: Fixed costs are those costs that do not vary with the level of output. Examples of fixed costs include rent, salaries, and insurance premiums. Since the firm is not able to cover its variable costs (i.e., the cost of producing each unit of output), it would not be able to cover its fixed costs either. This would lead to losses for the firm.

3. The firm would not be able to stay in the market in the long run: If the firm continues to operate in the market, it would incur losses in the short run. However, in the long run, it would not be able to sustain its operations because it would not be able to cover its fixed costs. Therefore, the firm would either have to shut down its operations or exit the market.

Conclusion:

In conclusion, if under perfect competition, the price line lies below the average cost curve, the firm would incur losses. This is because the market price would be lower than the cost of producing the product, and the firm would not be able to cover its fixed costs. Therefore, the firm would not be able to sustain its operations in the long run.

When price line is below average cost curve, average cost incurred by the firm is more than the revenue it earns by price. when the expenses are greater than revenue ,it is loss