Long Run versus Short Run
Competitive market equilibrium is the traditional concept of economic equilibrium, appropriate for the analysis of commodity markets with flexible prices and many traders. It relies crucially on the assumption of a competitive environment where each trader decides upon a quantity that is so small compared to the total quantity traded in the market that their individual transactions have no influence on the prices. This paper will discuss the short run competitive equilibrium versus the long run competitive equilibrium and the differences between the short run and long run shut down decision of a firm.
2. Short run versus long run competitive equilibrium in an economy with production
Market equilibrium exists when the total amount the firms wish to supply is equal to the total amount the consumers wish to demand. In a diagram, the equilibrium price is the price at which the demand and supply curves cross.
The long and the short run do not refer to a specific period of time such as three months or five years. The difference between the two is the flexibility decision makers have. "Economics" of Parkin and Bade's gives an excellent distinction between them: "The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs can be varied.
2.2 Short run supply curve
A perfectly competitive firm's supply curve is that portion of its marginal cost curve that lies above the minimum of the average variable cost curve. A perfectly competitive firm maximizes its profits by choosing to supply the level of output where its marginal revenue equals its marginal cost. When marginal revenue exceeds marginal cost, the firm can earn greater profits by increasing its output. When marginal revenue is below marginal cost, the firm is losing money,... [continues]
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