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How can I explain Long Run Equilibrium of firm under perfect competition?
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In perfect competition, a firm will, in the long term, produce a guantity of goods where MR = MC. The price at this point will be dictated by the market because the firm is a price taker.
The firm in long run equilibrium will be making zero economic profit because no economic profit is possible, long term, in perfect competition.
At this output level, the MR will be equal to the minimum point on the long run average cost curve.
At this point, there will be no reason for the firm to change its output level, the size of its factories, or anything else. Until something changes in the market, it will remain as it is.
Posted by pohnpei397 on October 29, 2009 at 1:13 AM (Answer #1)
Under perfect competition, a single firm has no influence over the market price, which is common for all the firms in the market. The firm can supply as much quantity as it wants at this price. Therefore the firm has no motivation to decrease the price. However, if it increases the price even by the slightest amount, its sales will drop down to zero.
In a situation the firm will go on increasing its supplies till it reaches a sales volume where marginal revenue generated by the increased sales is more than or equal to the marginal cost it incurs for producing the additional goo quantity.
In a perfectly competitive market the marginal revenue, that is revenue per additional unit sold is always equal to the market price for every firm in the market. The marginal cost, that is the additional cost incurred for producing one additional unit may behave differently for different forms. How ever it typically follows a pattern in which the marginal cost reduces with increase in total production volume up to a point. Beyond this level of production the marginal cost again starts rising. In this way the marginal revenue, which is same as market price equals at two levels of company production. The equilibrium quantity is higher of the two levels.
Posted by krishna-agrawala on October 29, 2009 at 1:43 AM (Answer #2)
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