Economics
Long Run Competitive Equilibrium
Long run competitive equilibrium occurs when firms in a perfectly competitive market earn zero economic profit. This state is achieved when the market price equals the minimum average total cost, leading to an optimal allocation of resources. In this equilibrium, firms are operating at their most efficient level, and there are no incentives for new firms to enter or existing firms to exit the market.
Written by Perlego with AI-assistance
Related key terms
1 of 5
10 Key excerpts on "Long Run Competitive Equilibrium"
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
Explain how this arbitrage is what occurs in the long-run adjustments of firms entering an industry. In the long run, perfectly competitive firms earn normal profits. 9. What are the long-run equilibrium results of a perfectly competitive market? 534 Chapter 24 Perfect Competition Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. It is so important to keep in mind the distinctions between economic and accounting terms that we repeatedly remind you of them. A zero economic profit is a normal accounting profit , or just normal profit . It is the profit that is just sufficient to keep a business owner or investors in a particular line of business, the point where revenue exactly equals total oppor-tunity costs. Business owners and investors earning a normal profit are earning enough to cover their opportunity costs—they could not do better by changing—but they are not earning more than their opportunity costs. An economic loss refers to a situation in which revenue is not sufficient to pay all of the opportunity costs. A firm can earn a positive accounting profit and yet be experiencing a loss, not earning a normal profit. The long-run equilibrium position of the perfectly competitive market structure shows firms producing at the minimum point of their long-run average-total-cost curves. If the price is above the minimum point of the ATC curve, then firms are earning above-normal profits, and entry will occur. If the price is less than the minimum of the ATC curve, exit will occur.
eBook - ePubA Primer on Microeconomics, Second Edition, Volume II
Competition and Constraints
- Thomas M. Beveridge(Author)
- 2018(Publication Date)
- Business Expert Press(Publisher)
CHAPTER 6 Perfect Competition in the Long RunChapter Preview: In Chapter 5 , we examined short-run production conditions, and then, turned our attention to the decisions faced by a perfectly competitive entrepreneur operating in the short run. We adopt the same approach in this chapter, but for the long run. Also, we establish “performance criteria” for an industry in long-run equilibrium and revisit the concept of efficiency that we first met in Chapter 1, but explored more comprehensively in Chapter 3.By the end of this chapter, you will be able to:• Explain why the long-run average cost curve is U-shaped and give examples of factors that would cause economies or diseconomies of scale.• Outline the process by which long-run competitive equilibrium is achieved.• Indicate the long-run equilibrium profit-maximizing level of production.• List the performance criteria that hold in the perfectly competitive long-run equilibrium model and indicate how perfect competition results in efficient production.• Define allocative (Pareto) efficiency and explain why a perfectly competitive economy allocates resources efficiently, distributes outputs efficiently, and achieves the optimal output mix.• Identify two major causes of market failure and their consequences.There is an old joke about an economics professor (Ed) and a business professor (Bob) who are walking along, with Ed a few steps ahead of his colleague. Each spots a $20 bill lying on the sidewalk. Ed walks past the bill, but Bob swoops down and claims it. “Why didn’t you grab the Jackson?” he asks. “Because, logically, it shouldn’t be there!” replies Ed.Used to thinking about the long run, the economist realizes that in the long run, the bill will be picked up. His colleague recognizes a short-run profit opportunity when he sees it! Note, though, that after Bob acts, the profit opportunity disappears and the validity of Ed’s assumption is restored.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Exhibit 9 shows a representative firm and the market in long-run equi-librium. Market supply adjusts as firms enter or leave or change their size. This long-run adjustment continues until the market supply curve intersects the market demand curve at a price that corresponds to the lowest point on each firm’s long-run average cost curve, or LRAC curve. Because the long run is a period during which all resources under a firm’s control are variable, a firm in the long run is forced by competition to adjust its scale until average cost is minimized. A firm that fails to minimize average cost will not survive in the long run. At point e in panel (a) of Exhibit 9, the firm is in equilibrium, producing q units per period and earning just a normal profit. At point e , price, marginal cost, short-run average Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 180 Part 3 Market Structure and Pricing total cost, and long-run average cost are all equal. No firm in the market has any reason to change its output, and no outside firm has any incentive to enter this industry, because firms in this market are earning normal, but not economic, profit. In other words, all resources employed in this industry earn their opportunity costs. No resource employed in this indus-try can earn more elsewhere. 8-5b Long-Run Adjustment to a Change of Demand To explore the long-run adjustment process, let’s consider how a firm and an industry respond to an increase in market demand.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Because the long run is a period during which all resources under a firm’s control are variable, a firm in the long run is forced by competition to adjust its scale until average cost is minimized. A firm that fails to minimize average cost will not survive in the long run. At point e in panel (a) of Exhibit 9, the firm is in equilibrium, producing q units per period and earning just a normal profit. At point e, price, marginal cost, short-run average Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 180 Part 3 Market Structure and Pricing total cost, and long-run average cost are all equal. No firm in the market has any reason to change its output, and no outside firm has any incentive to enter this industry, because firms in this market are earning normal, but not economic, profit. In other words, all resources employed in this industry earn their opportunity costs. No resource employed in this indus- try can earn more elsewhere. 8-5b Long-Run Adjustment to a Change of Demand To explore the long-run adjustment process, let’s consider how a firm and an industry respond to an increase in market demand. Suppose that the costs facing each firm do not depend on the number of firms in the industry (an assumption explained soon). Increase of Demand Exhibit 10 shows a perfectly competitive firm and industry in long-run equilibrium, with the market supply curve intersecting the market demand curve at point a in panel (b). The market-clearing price is p, and the market quantity is Q a .
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
So, when all the firms in the industry experience normal profits only in the long run, the point of equilibrium is LRMC=MR=AR=Price=LRATC. As in short run, we can study the equilibrium of the firm and industry under perfect competition in the long run under two conditions viz ., identical cost conditions and varying cost conditions. i. Long Run Equilibrium of the Firms and Industry under Identical Cost Conditions As discussed earlier, when we assumed identical cost conditions, it This ebook is exclusively for this university only. Cannot be resold/distributed. implies all the factors of production are homogenous thereby, all the firms will incur same costs in the industry to produce a given output. Thus, there will not be any shift in the cost curves with respect to all the firms. We know, each firm under perfect market competition is only a price taker, thereby, first the price is determined based on total demand and total supply of paddy in the industry and the same price is passed on to the individual firms. In Panel A of the Figure 8.6 , DD is the initial demand curve of the industry for paddy and SS is the initial supply of paddy in the industry in the long run production programme. The demand curve DD intersects the supply curve SS at point E, where OQ quantity of paddy is supplied and demanded in the industry at OP long run equilibrium price. This price OP is passed on to the individual firms, as they are simply price takers in the market. Figure 8.6 : Equilibrium of Firm and Industry under Perfect Competition in the Long Run under Identical Cost Conditions. In Panel B of the Figure 8.6 , a single firm is taken as a representative, as cost structure remains same across the firms under identical cost conditions. So, for the firm, the price of paddy is OP. We know, for a firm under perfect competition, MRC and ARC curves are parallel to X-axis and MRC coincides with ARC.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
In the long run, positive economic profits will attract competition as other firms enter the market. Economic losses will cause firms to exit the market. Ultimately, perfectly competitive markets will attain long-run equilibrium when no new firms want to enter the market and existing firms do not want to leave the market, as economic profits have been driven down to zero. 8.2 | How Perfectly Competitive Firms Make Output Decisions By the end of this section, you will be able to: • Calculate profits by comparing total revenue and total cost • Identify profits and losses with the average cost curve • Explain the shutdown point • Determine the price at which a firm should continue producing in the short run A perfectly competitive firm has only one major decision to make—namely, what quantity to produce. To understand this, consider a different way of writing out the basic definition of profit: Profi = Total revenue − Total cost = (Price)(Quantity produced) − (Average cost )(Quantity produced) Since a perfectly competitive firm must accept the price for its output as determined by the product’s market demand and supply, it cannot choose the price it charges. This is already determined in the profit equation, and so the perfectly competitive firm can sell any number of units at exactly the same price. It implies that the firm faces a perfectly elastic demand curve for its product: buyers are willing to buy any number of units of output from the firm at the market price. When the perfectly competitive firm chooses what quantity to produce, then this quantity—along with the prices prevailing in the market for output and inputs—will determine the firm’s total revenue, total costs, and ultimately, level of profits. Determining the Highest Profit by Comparing Total Revenue and Total Cost A perfectly competitive firm can sell as large a quantity as it wishes, as long as it accepts the prevailing market price.
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
In a constant-cost industry, in long-run equilibrium, all firms earn zero economic profit. Remember, though, that entry and exit take time. In the real world, a firm cannot instantly convert itself from a clothing store to a barbershop. If the demand for hair-cuts rises, barbers might earn positive profits for quite awhile until enough firms enter the industry to drive profits back down to zero. During that time, the industry is not in long-run equilibrium. Many economists argue that long-run zero-profit equilibrium is almost never reached, because demand curves and cost curves shift so often that the entry and exit process never settles down. Although this is arguably true in many industries, the zero-profit condition remains a useful approximation to the truth. Cost Minimization The zero-profit condition has an interesting side effect: A firm earning zero profit must be operating at the point where its marginal and average cost curves cross. But we saw way back in Exhibit 6.5 that the marginal and average cost curves cross at the bottom of the average cost curve. Therefore: In long-run equilibrium in a constant-cost industry, every firm produces at the lowest possible average cost. EXHIBIT 7.14 Long-Run Competitive Equilibrium Price Quantity Industr y Firm D Price Quantity LRS d MC A C The industry-wide equilibrium occurs at the break-even price. Firms face a demand curve that is flat at that price. © Cengage Learning 190 CHAPTER 7 Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Dangerous Curve No firm sets out to minimize average cost.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales. In a perfectly competitive market there are thousands of sellers, easy entry, and identical products. A short-run production period is when firms are producing with some fixed inputs. Long-run equilibrium in a perfectly competitive industry occurs after all firms have entered and exited the industry and seller profits are driven to zero. Perfect competition means that there are many sellers, there is easy entry and exiting of firms, products are identical from one seller to another, and sellers are price takers. 8.2 How Perfectly Competitive Firms Make Output Decisions As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price. Profits will be highest (or losses will be smallest) at the quantity of output where total revenues exceed total costs by the greatest amount (or where total revenues fall short of total costs by the smallest amount). Alternatively, profits will be highest where marginal revenue, which is price for a perfectly competitive firm, is equal to marginal cost. If the market price faced by a perfectly competitive firm is above average cost at the profit-maximizing quantity of output, then the firm is making profits. If the market price is below average cost at the profit-maximizing quantity of output, then the firm is making losses. If the market price is equal to average cost at the profit-maximizing level of output, then the firm is making zero profits. We call the point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve, the “zero profit point.” If the market price that a perfectly competitive firm faces is below average variable cost at the profit-maximizing quantity of output, then the firm should shut down operations immediately.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales. In a perfectly competitive market there are thousands of sellers, easy entry, and identical products. A short-run production period is when firms are producing with some fixed inputs. Long-run equilibrium in a perfectly competitive industry occurs after all firms have entered and exited the industry and seller profits are driven to zero. Perfect competition means that there are many sellers, there is easy entry and exiting of firms, products are identical from one seller to another, and sellers are price takers. 8.2 How Perfectly Competitive Firms Make Output Decisions As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price. Profits will be highest (or losses will be smallest) at the quantity of output where total revenues exceed total costs by the greatest amount (or where total revenues fall short of total costs by the smallest amount). Alternatively, profits will be highest where marginal revenue, which is price for a perfectly competitive firm, is equal to marginal cost. If the market price faced by a perfectly competitive firm is above average cost at the profit-maximizing quantity of output, then the firm is making profits. If the market price is below average cost at the profit-maximizing quantity of output, then the firm is making losses. If the market price is equal to average cost at the profit-maximizing level of output, then the firm is making zero profits. The point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve, is called the “zero profit point.” If the market price faced by a perfectly competitive firm is below average variable cost at the profit-maximizing quantity of output, then the firm should shut down operations immediately.
eBook - PDFFull Industry Equilibrium
A Theory of the Industrial Long Run
- Arrigo Opocher, Ian Steedman(Authors)
- 2015(Publication Date)
- Cambridge University Press(Publisher)
We aim to shed more light on the microeconomics of industry equilibrium when there is an economy-wide tendency to vanishing net profits, claiming that this tendency alone provides a sufficient reason for a series of results (of either a positive or a negative nature) to hold. This may be a useful building block common to many overall theories. The distinction between a short-run and a long-run industry equi- librium, the latter being characterized by zero net profits, is of course a locus classicus of many textbooks; comparisons between distinct long- run equilibria are typically focused on a change in the number of firms brought about by a change in output demand, in a regime of free entry and exit (e.g. Mas-Colell et al., 1995, pp. 340–41); far less attention, if any, is devoted to other shocks, which modify the long-run equilibrium of the individual firm, independently of any effect on the number of the firms. It is with just such other shocks that we shall be particularly concerned. 18 Taking seriously the tendency to zero net profits The concept of a full industry equilibrium which will be developed in this book needs some preliminary discussion. Knut Wicksell, in his Lectures on Political Economy, called ‘Full Equilibrium’ for a firm a situation in which the firm operates at an optimum scale minimizing its average cost and selling its output at a price equal to this minimum average and to marginal cost (Wicksell, 1934 [1901], p. 130). In his understanding, equilibrium is ‘full’ when not only does each firm attain the maximum possible profit in given market circumstances, but also such circumstances have been shaped by the forces of competition and this maximum profit is equal to zero. Wicksell had in mind a firm which is very small relative to the industry, so that his conception of a ‘Full Equilibrium’ in fact is in harmony with the long-run theory of Flux, Edgeworth, Pigou and Viner. We borrow Wicksell’s terminology, but widen its scope.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
