When A Perfectly Competitive Industry Is In A Long-Run Equilibrium, All The Firms In The Industry Will
When A Perfectly Competitive Industry Is In A Long-Run Equilibrium, All The Firms In The Industry Will…
Answer: In a perfectly competitive industry, when it reaches long-run equilibrium, all the firms will experience several key characteristics:
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Zero Economic Profit: All firms in the industry will earn normal profit, which means they achieve zero economic profit. This occurs because in the long run, any economic profit attracts new firms to the market, increasing supply until profits are eliminated. Conversely, if firms incur losses, some will exit, reducing supply until only normal profit is achieved.
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Price Equals Minimum Average Total Cost (ATC): The price of the product is equal to the minimum point of the average total cost curve (ATC). This ensures that the firms are producing at the most efficient scale.
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Marginal Cost Equals Marginal Revenue Equals Price (MC = MR = P): Firms are producing at a level where the marginal cost of producing one more unit equals the marginal revenue from selling that unit, which is also equal to the market price. This ensures allocative efficiency, meaning resources are distributed optimally based on consumer preferences.
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Productive Efficiency: Firms produce at the lowest point on their average total cost curve, meaning they are utilizing resources in the most efficient manner possible, without any wastage.
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Industry Stability: In long-run equilibrium, the number of firms and the supply of the product remain stable, because there’s no incentive for new firms to enter or existing firms to exit.
Summary: In long-run equilibrium, perfectly competitive firms earn zero economic profit, price equals minimum ATC, and they achieve both allocative and productive efficiency. Resources are used optimally, with stable industry conditions.