Microeconomics: Long-run Equilibrium of Firm and Industry

Long-run Equilibrium of the Firm and Industry under Perfect Competition

• Long-run equilibrium of the firm and industry under perfect competition occurs when the firm and industry are in equilibrium at the same time.
• This equilibrium is achieved when the firm earns a normal profit and there is no incentive for new firms to enter or existing firms to exit the industry.

The Firm in Long-run Equilibrium

• In long-run equilibrium, the firm produces at the minimum point of the average cost curve.
• The firm's marginal cost (MC) equals its marginal revenue (MR).
• The firm's average cost (AC) equals its average revenue (AR).
• The firm earns a normal profit.

Industry in Long-run Equilibrium

• In long-run equilibrium, the industry is in equilibrium when the quantity supplied by the industry equals the quantity demanded by the market.
• The industry supply curve is horizontal, indicating that the industry is perfectly competitive.

Impact of Entry and Exit on Equilibrium

• Entry of new firms into the industry leads to an increase in the industry supply, causing a decrease in the market price.
• Exit of firms from the industry leads to a decrease in the industry supply, causing an increase in the market price.
• The process of entry and exit leads to the long-run equilibrium of the industry.

Important Concepts

• Market structure: Perfect competition, monopoly, monopolistic competition, oligopoly.
• Perfect competition: Many firms producing homogeneous products, free entry and exit, and perfect information.
• Shut-down rule: A firm shuts down if the price is less than the average variable cost.
• Profit-maximising rule: A firm produces where marginal cost equals marginal revenue.
• Total cost (TC), average cost (AC), average variable cost (AVC), marginal cost (MC), total profit, normal profit, economic profit, break-even point.

Quiz on the concept of long-run equilibrium of a firm and industry under perfect competition. Based on Textbook page 175.