Draw A Precise Diagram And Explain The Long Run Equilibrium

Draw A Precise Diagram And Explain The Long Runequilibrium Configurati

Draw a precise diagram and explain the long-run equilibrium configuration of a firm in a perfectly competitive market. Why is the price always equal to LAC under long-run equilibrium in this type of market? (Please write the answer in your own words—plagiarism will cost you marks; do NOT upload jpg or png files—upload your answer in either Word or PDF format.) There is no specific word limit, but be succinct in your explanation.

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The long-run equilibrium of a firm in a perfectly competitive market is characterized by a unique and stable situation in which firms operate at their most efficient level, earning normal profits without any incentives for entry or exit. To illustrate this concept, a precise diagram typically features the firm’s average cost curves—namely the long-run average cost (LAC) and the marginal cost (MC)—along with the market price (P) determined by overall supply and demand in the industry.

In the diagram, the long-run equilibrium point occurs where the market price (P) equals both the minimum point of the LAC curve and the marginal cost (MC) at the profit-maximizing output level (Q). The LAC curve is U-shaped, reflecting economies and diseconomies of scale. The firm produces at the quantity where MC intersects LAC at its lowest point—this is the most efficient scale of operation.

At this equilibrium, the firm’s average total cost equals the market price, implying zero economic profit. If the market price were above the LAC at the equilibrium output, firms would be incentivized to enter the industry to capitalize on excess profits, shifting supply outward and lowering the price. Conversely, if the price were below the LAC, firms would exit due to losses, reducing supply and driving the price upward. This ongoing process continues until the market stabilizes at a point where the price equals LAC, and firms earn normal profits.

Within this equilibrium, the equality of price and LAC ensures that firms efficiently allocate resources, producing at the lowest possible cost per unit. This efficiency benefits consumers through lower prices and optimal resource utilization. Moreover, the condition that price equals LAC reflects that firms operate at their most productive scale, avoiding over- or under-utilization of resources.

The reason behind the price always equaling LAC in long-run equilibrium stems from the free entry and exit of firms in a perfectly competitive market. These entry and exit dynamics enforce the condition that firms earn zero economic profit, which aligns price with the minimum point of LAC. If any deviation occurred initially, market forces would correct it through adjustments in industry supply, restoring equilibrium at the point where price equals LAC and firms produce efficiently.

In conclusion, the long-run equilibrium configuration of a firm in a perfectly competitive market is where the price equals the minimum of the long-run average cost curve, with firms producing at the most efficient scale. This situation ensures that resources are allocated optimally, and no firm has an incentive to change its level of output or to enter or exit the market. The persistent equality of price and LAC is a defining feature of perfect competition, emphasizing efficiency and market stability in the long run.

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