All the firms in a competitive industry achieve long run equilibrium when market price or marginal revenue equals marginal cost equals minimum of average total cost.
Formula:
Price = Marginal Cost = Minimum Average Total Cost
Explanation:
The long run is a period of time during which the firms are able to adjust their outputs according to the changing conditions. If the demand for a product increases, all the firms have sufficient time to expand their plant capacities, train and engage more labor, use more raw material, replace old machines, purchase new equipments, etc., etc.
If the demand for a product declines, the firms reduce the number of workers on the pay roll, use fewer raw materials. In short, all inputs used by a firm are variable in the long run. It is assumed that all the firms in the competitive industry are producing homogeneous product and an individual firm cannot affect the market price. It takes the market price as given. It is also assumed that all the firms in a competitive industry have identical cost' curves. The industry it is assumed is, a constant cost industry. In the long run, it is further assumed that all the firms in a competitive industry have access to the same technology.
When the period is long and profit level of the competitive industry is high, then new firms enter the industry. If the profit level is below the competitive level, the firm then leave the industry. When all the competitive firms earn normal profit, then there is no tendency for the new firms to enter or leave the industry. The firms are then in the long run equilibrium.
Diagram:
The case of long-run equilibrium of a firm can be easily explained with .the help of a diagram given below:
marto answered the question on
April 16, 2019 at 13:06