What is the long run equilibrium price in a percectly competitive industry ?

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Expert Solution

Ans) Perfect competition is when there are may sellers selling homogeneous products. There is no barrier to entry and exit. Firms are price takers.

Market price is equal to marginal revenue (P = MR) in perfect competition because no matter what quantity they sell, they will always receive the same price.

A profit maximising firm produces the quantity where MR and MC curve intersect.

If price is above ATC, firms earn positive economic profit and more firms will enter into the market and supply will increase. As a result, price will decrease till it reaches minimum of ATC, where firms will earn zero economic profit.

If price is below ATC, firms earn negative economic profit and some firms will exit the market and supply will decrease. As a result, price will increase till it reaches minimum of ATC, where firms will earn zero economic profit.

That is, a Perfectly competitive firm may earn positive or negative economic profit in short run but in long run, they will always earn zero economic profit. And price will be equal to minimum of ATC.

Rahul Sunny answered 1 year ago

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