Long Run Equilibrium in Perfect Competition

Thu, 04/19/2012 - 10:05 -- Umar Farooq

Long Run Equilibrium in Perfect Competition

In Long run all the inputs are variable, to get maximum profit there is an option with entrepreneur to adjust his plant size as well as his output. In the long run entrepreneur can extend the period of time so that output of the firms and the industry can be varied through a change in the scale of plant.

Thus, there is plenty of time for the firms to enter and leave the industry. With time one can transfer his resources into a command over resources into a more profitable investment alternative. Adjustment of the number of firms in the industry in response to profit maximization is the key element in establishing long run equilibrium.

Long Run Equilibrium of the Firm

In the long run firms are in equilibrium when they have adjusted their plant so to produce at the minimum point of their long run average cost curve which is tangent to the demand curve defined by market price. In the long run firms will be earning normal profits or pure economic profits which are included in LAC. If they are making excess profits new firms will be attracted in the industry this will lead to fall in prices and an upward shift to the right of supply curves due to the increase in quantity supplied of the firms. As the industry expands output prices will fall until the LAC is tangent to the demand curve defined the market prices.  If the firms make losses in the long run they will leave the industry, prices will rise and cost fall as the industry contracts until the remaining firms cover their total costs.