It is crucial to determine the meaning of ‘firm and industry’ before analyzing the graph of a purely competitive firm in the long-run equilibrium. A firm is an organization that produces and supplies different types of goods in the respect of public demands. It is done eyeing customer satisfaction and maximizing the profits. It can also buy and hire various resources and sale-related goods and services. To make it simpler, it is a unit that employs aspects of production for producing commodities sold to other firms, government, and households.
Industry, on the other hand, is a group of firms that produce homogenous products in the market. They sell specific products which are not obtainable in other market bases.
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Long-run Equilibrium of the Firm
To define the long-run equilibrium of firm and industry under perfect competition, we need to take a look more precisely. It is possible that a firm’s cost functions may get affected due to the changes in industry output. Long-run equilibrium of the firm under perfect competition may contract or expand based on the changes in the industry’s demands. This also leads to changes in price input. This scenario is common, especially for an input for which the industry is looking to use a significant fraction of the entire amount of that particular input available in the economy.
This is the reason, it is crucial to index the cost functions of the firms based on the industry output. TCY(y) illustrates that the total costs of producing y units in a particular situation when the industry’s output is Y. If the industry output increases in prices of the inputs, then the TC increases with respect to Y: TCY'(y) > TCY(y). To make it simpler, a firm is in the equilibrium model when it does not tends to change the level of output. Therefore, they need no further contraction or expansion. It is for acquiring maximum profits by equating the marginal costs along with the marginal revenue (MC = MR). Understanding the long-run equilibrium of the firm and industry under perfect competition will help you to craft the accounts and business prospects to a higher degree.
Condition for the Long-run Equilibrium of a Firm
An industry is considered to be in equilibrium when there is a completely null chance for the firms to leave or enter the industry. Also, it depends on the factor that if each firm is in equilibrium. The first condition is possible when the average cost coincides with the average revenue shown by all the firms. In this case, they are making normal profits that are to be included in the average cost.
Long-run equilibrium of firm and industry under perfect competition, as per the second case, is possible with the equality of MR and MC, as follows.
AR = MR
MC = MR
AC = AR
MC = AC = AR
These situations indicate the full equilibrium of an industry.
Long-run Equilibrium of the Industry
The factors and characteristics of long-run equilibrium for a perfectly competitive firm are variable and none of them are fixed. The period of the long run is sufficiently long for the firms that allow making changes in terms of production. Therefore, the firms can increase the output as per the changes in capital equipment. They can also wish to expand their old plants or consider replacing lower-capacity plants. Equilibrium of a firm under perfect competition long-run allows new firms to enter the industry and compete with the existing firms. On the other hand, the firms can contract the level of output by minimizing the capital equipment.
Long-run equilibrium of the firm under perfect competition refers to the situations when the capital equipment is allowed for full and free adjustments along with the number of firms. Therefore, the long-run average and marginal cost curve are relevant when it comes to deciding the output of equilibrium in the long run.
FAQs on Long-Run Equilibrium of Competitive Firm and Industry
Q1. Define the Long-run Equilibrium of the Firm under perfect competition.
Answer: It is the consumer demands and production costs that decide a firm’s existence. Also, the behaviour, size, and numbers of other firms in the industry matter. Therefore, the graph of a purely competitive firm in long-run equilibrium is based on the degree of competition a firm is facing and this can further limit the choices when it comes to setting the prices. This helps in protecting the interests of customers. Interestingly, as industries differ based on the numbers and sizes of the firms, equilibrium can be achieved under perfect competition only if marginal cost equals the price rate. However, as the firm is in the long-run equilibrium, the price should also match with the average cost.
Q2. What is the characteristic of Long-run Equilibrium for a perfectly competitive firm?
Answer: The primary characteristic of a scenario which is a perfectly competitive market is the fact when organizations earn zero economic profits. This means positive economic profits are temporary in terms of the short-run. The characteristics are actually the results due to the lack of barriers that tend to enter the market. The situation can be viewed as a profit-maximizing competition in the long run.
Q3. What is economic Profit and Loss?
Answer: Economic profits and losses are an important part of the model of perfect competition. The existence of profits attracts new firms to enter into an industry in the long run. Naturally, the supply curve shifts to the right, profits fall and price falls due to the introduction of new firms in the industry. Firms continue to enter until the economic profits reach to zero. Due to losses, when firms start leaving the industry, the supply curve shifts to the left, and eventually price increases with the reduction of losses. Firms continue leaving the industry until other companies experience zero losses and the economic profits are zero. Therefore, discerning the facts and the graph of a purely competitive firm in long-run equilibrium is crucial before examining the mechanism of entry and exit in an industry.