Question

How competitive markets adjust to long run changes?

• Technological improvement and perfect competition

• The effect of perfect competition and size of the firm

Answer 1

A. In long run , a perfectly competitive market sees an increase in the technical progress of industry. Technical progress reduced the average cost while increasing the productivity of plant. In long run, with Economies of scale kicking in , also the production rises. With time technology changes to beingore efficient , hence the prices of the products in perfect competition will start to fall gradually with increasingly effective and low cost technology.

B. Talking about the size of the firm , the size of the plant might expand with increasingly expanding market which comes as a result of technological advancements in long run. In addition , in long run the average cost is minimised making the prices equal to average cost also equal to marginal cost. In long run there are no super normal profits but only normal profits operating. This is also because in long run all the firms operational do not face any losses . This nature of the firms working in long run also encourage more and more number of firms to enter the competition, however only those survive who can face the high competition and are able to extract normal profits.Thus in conclusion , the firms tend to increase their size in long run because of capacity expansion due to economies of scale , Technological advancements and the nature of the firms operational for long run extracting only normal profits and no loss .