![]() ![]() Some firms will continue producing where the new P = MR = MC, as long as they are able to cover their average variable costs. The existing firms in the industry are now facing a lower price than before, and as it will be below the average cost curve, they will now be making economic losses. This time, instead, demand decreases, and with that, the market price starts falling. Say that the market is in long-run equilibrium. ![]() Short-run losses will fade away by reversing this process. This will stop whenever the market price is driven down to the zero-profit level, where no firm is earning economic profits. As long as there are still profits in the market, entry will continue to shift supply to the right. ![]() As the supply curve shifts to the right, the market price starts decreasing, and with that, economic profits fall for new and existing firms. Entry of many new firms causes the market supply curve to shift to the right. However, these economic profits attract other firms to enter the market. ![]() This will temporarily make the market price rise above the minimum point on the average cost curve, and therefore, the existing firms in the market will now be earning economic profits. The existing firms in the industry are now facing a higher price than before, so they will increase production to the new output level where P = MR = MC. Let’s say that the product’s demand increases, and with that, the market price goes up. No firm has the incentive to enter or leave the market. The market is in long- run equilibrium, where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC. To understand how short-run profits for a perfectly competitive firm will evaporate in the long run, imagine the following situation. Entry and exit to and from the market are the driving forces behind a process that, in the long run, pushes the price down to minimum average total costs so that all firms are earning a zero profit.īack to : ECONOMIC ANALYSIS & MONETARY POLICY In turn, a shift in supply for the market as a whole will affect the market price. However, the combination of many firms entering or exiting the market will affect overall supply in the market. No perfectly competitive firm acting alone can affect the market price. What is the Long-Run Equilibrium in a Perfectly Competitive Market? ![]()
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