A competitive firm receives in the long run. Competitive firm in the long run
Perfect competition forces firms to produce products at the lowest average cost and sell it at a price corresponding to this cost. Graphically, this means that the average cost curve only touches the demand curve.
If the cost of producing a unit of output were higher than the price (AC > P), then any product would be economically unprofitable and firms would be forced to leave the industry. If average cost were below the demand curve and, accordingly, prices (AC P), then this would mean that the average cost curve crossed the demand curve and a certain amount of production would be formed that would bring excess profit. An influx of new firms would sooner or later wipe out those profits. Thus, the curves only touch each other, which creates a situation of long-term equilibrium: no profit, no loss. Let us consider this price setting mechanism in more detail, graphically examining the consequences of a change in industry demand on the equilibrium of a firm and an industry.
From fig. 11.12 we can deduce the following.
A feature of the long run is that a firm can change all the factors of production and even leave the industry, while other firms can enter it.
If the market demand for the industry's products shifts from D x before D2 equilibrium price rises to R 2(Fig. 11.12).
Rice. 11.12.
Guided by the principle of profit maximization, firms will increase supply to q2, which would mean an increase in industry supply to Q r
Equilibrium price R 2 will be more LRAC, therefore, firms in the industry will receive economic profit. This will attract new firms to the industry, which will lead to an increase in industry supply and a downward shift of the supply curve to the right (curve S2).
If, as a result of an increase in industry supply, the equilibrium price R 3 will be less LRAC, then firms in the industry will suffer economic losses. As a result, some firms will leave the industry, which will lead to a decrease in industry supply and an upward shift of the supply curve to the left.
Changes in supply associated with changes in price will lead to a return of the equilibrium price to the initial price level and the establishment of a new long-term market equilibrium at the volume of production Q4.
All firms in the industry will produce products with LRAC m)
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