Question

Explain why in the long run, perfectly competitive firms will make no profit. What is the...

Explain why in the long run, perfectly competitive firms will make no profit. What is the long run equilibrium condition for a firm? ( first assume firm are making positive profits and then assume some firms are making negative profits... graphs).

Homework Answers

Answer #1

In a perfectly competitive market inlong-run equilibrium, an increase in demand creates economic profit in the short run and induces entry in the long run; a reduction in demand creates economic losses in the short run and forces some firms to exit the industry in the long run .

The condi­tion for long-run equilibrium of the firm can be written as:

Price = Marginal Cost = Minimum Average Cost.

Fig. represents long-run equilibrium of firm under perfect compe­tition. The firm cannot be in the long-run equilibrium at a price greater than OP in Fig. This is be­cause if price is greater than OP, then the price line (demand curve) would lie somewhere above the minimum point of the av­erage cost curve so that marginal cost and price will be equal where the firm is earning abnormal profits.

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