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.