ECON1101 Chap.12 Long-Run Competitive Market Equilibrium
Long-Run Competitive Market Equilibrium
Long-Run Competitive Market Equilibrium follows a competitive industry after a shock has worked through. With identical firms and a pool of identical entrants, economic profit attracts entry and losses cause exit until price returns to the minimum of long-run average total cost, where firms break even. The long-run supply curve is therefore perfectly elastic.
The chapter pairs a typical-firm diagram with a market diagram and shows that a demand change alters the number of firms while price and output per firm return to their old levels. A worked example counts firms before and after a demand increase, and the drills cover a demand fall and a new fixed licence fee for a competitive industry.
What this chapter covers
- 01
Assumptions of perfect competition
- 02
The long-run break-even point
- 03
Short run versus long run at firm and market level
- 04
Entry when price exceeds minimum ATC
- 05
Exit when price falls below minimum ATC
- 06
Perfectly elastic long-run supply
Worked example · free
Counting firms after demand rises
- 1In long-run equilibrium P = minimum ATC = $26 both before and after.
- 1Before: Q = 1,250 − 650 = 600, so 600/6 = 100 firms.
- 1After: Q = 1,400 − 650 = 750, so 750/6 = 125 firms.
- 1Short-run profit from the higher price draws in 25 entrants until price is back at $26.
Key terms
- Long-run equilibrium
- Long-run equilibrium is a state in which no firm wants to enter or leave the market, with price at minimum average total cost.
- Free entry and exit
- Free entry and exit is the absence of barriers that would stop firms joining or leaving a market.
- Long-run supply curve
- The long-run supply curve shows market output at each price once entry and exit are complete, horizontal in this model.
- Break-even price
- The break-even price is the price equal to minimum average total cost, at which economic profit is zero.
Long-Run Competitive Market Equilibrium FAQ
Why does long-run economic profit fall to zero?
Positive economic profit attracts identical firms into the industry. Their entry shifts market supply to the right and lowers the price until it reaches minimum average total cost, where no further profit remains to attract anyone.
Why is the long-run supply curve horizontal?
Any price above minimum average cost draws in entrants and any price below it drives firms out. Because entrants have the same costs as existing firms, the market can supply any quantity at that one price in the long run.
What changes after a demand increase in the long run?
Market output and the number of firms rise. The price, each firm’s output and each firm’s economic profit return to their original values once entry has finished.
Do firms in long-run equilibrium really earn nothing?
They earn zero economic profit, not zero accounting profit. Their revenue covers all explicit costs and the owners’ opportunity costs, so staying in the industry is as good as their best alternative.
What happens in the short run after demand falls in a competitive industry?
The market price falls, each existing firm moves down its marginal cost curve and produces less, and firms make economic losses. As long as the price still covers average variable cost they keep producing, but in the long run some firms exit until the price recovers.
Why does output per firm return to the same level in the long run?
Firms in long-run equilibrium produce at the bottom of their average total cost curve, and with identical firms and an unchanged cost curve that bottom is at the same output as before. Changes in demand are absorbed by the number of firms, not by the scale of each one.
Exam move
Practise the paired diagram until you can draw it in under a minute: firm on the left with MC and ATC, market on the right with demand, short-run supply and a horizontal long-run supply line at minimum ATC. Run a demand increase, a demand decrease and a per-unit cost increase through it, writing what happens to price, firm output, market output, the number of firms and profit in the short run and the long run.
Write a short results table for each shock with the columns price, output per firm, market output, number of firms and profit, filled in once for the short run and once for the long run.
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