Microeconomics: Long-run Equilibrium of Firm and Industry

Study Notes

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.

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.

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.

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.

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.