Long Run Equilibrium
LONG-RUN EQUILIBRIUM OF A FIRM UNDER PERFECT COMPETITION
In the long run, a firm in the perfectly competitive market can earn only normal profit. So, the profit maximization under long run is:
(1)Necessary condition P=LMR=LAR=LMC=LAC
(2)Sufficient condition
Slope of MC > Slope of MR
We can establish this condition from the following analysis. In the above diagram for any market price OP1 the existing firms can earn supernormal profit as for the equilibrium output level OQ1. The average cost of production .i.e., OQ1 < OP1.
This supernormal profit attracts new entries in this market and as a result the market supply curve shifts towards right to SM3SM3 and the market price falls to the level OP0.
When the market price falls to OP0 which is less than the average cost of this firm; for this equilibrium output level OQ0 then the existing firm incur losses. As a result some firms immediately leave the market and the market supply curve shifts towards left. This process continues and ultimately the existing firm reaches the supply curve SM2SM2. For which the market equilibrium price is OPE is just equal to the average cost of production of the equilibrium output level OQE , so here the existing firms are earning only normal profit . so, here neither new entries are attracted into the market nor any of the existing firm shows tendency to leave. So, this is the equilibrium condition where firms are earning only normal profit i.e., just covering the average cost of production. So here we can see the necessary condition includes this minimum condition * Necessary condition
=P=LMR=LAR=LMC=LAC
* And sufficient condition
=Slope of MC > Slope of
In the long run, a firm in the perfectly competitive market can earn only normal profit. So, the profit maximization under long run is:
(1)Necessary condition P=LMR=LAR=LMC=LAC
(2)Sufficient condition
Slope of MC > Slope of MR
We can establish this condition from the following analysis. In the above diagram for any market price OP1 the existing firms can earn supernormal profit as for the equilibrium output level OQ1. The average cost of production .i.e., OQ1 < OP1.
This supernormal profit attracts new entries in this market and as a result the market supply curve shifts towards right to SM3SM3 and the market price falls to the level OP0.
When the market price falls to OP0 which is less than the average cost of this firm; for this equilibrium output level OQ0 then the existing firm incur losses. As a result some firms immediately leave the market and the market supply curve shifts towards left. This process continues and ultimately the existing firm reaches the supply curve SM2SM2. For which the market equilibrium price is OPE is just equal to the average cost of production of the equilibrium output level OQE , so here the existing firms are earning only normal profit . so, here neither new entries are attracted into the market nor any of the existing firm shows tendency to leave. So, this is the equilibrium condition where firms are earning only normal profit i.e., just covering the average cost of production. So here we can see the necessary condition includes this minimum condition * Necessary condition
=P=LMR=LAR=LMC=LAC
* And sufficient condition
=Slope of MC > Slope of