Microeconomics: Long-run Equilibrium of Firm and Industry

Questions and Answers

What happens to the average cost of production when a firm increases its scale of production to realize economies of scale?

The average cost of production decreases.

What is the point at which a firm's total revenue is equal to its total cost?

The break-even point.

What is the goal of a firm in a perfect competition market?

To maximize profit.

What is the supply curve of the firm?

The portion of the marginal cost curve above the average variable cost. Signup and view all the answers

What is the difference between normal profit and economic profit?

Normal profit is the minimum profit required to keep the firm in the industry, while economic profit is the profit in excess of normal profit. Signup and view all the answers

What happens to the marginal productivity of a variable input when the law of diminishing returns is applied?

It eventually decreases. Signup and view all the answers

What is the effect of an increase in the scale of production on the firm's average cost?

The average cost decreases. Signup and view all the answers

What is the role of the price taker in a perfect competition market?

The firm has no control over the market price and can only adjust its quantity supplied. Signup and view all the answers

What is the purpose of the shut-down rule?

To determine whether a firm should shut down production in the short run. Signup and view all the answers

What is the industry equilibrium?

The point at which the industry supply curve equals the industry demand curve. Signup and view all the answers

Study Notes

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.