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Long Run
In the long run in perfect competition every business will produce the output where Price (P) = Average Total Cost (ATC)
When Price is Greater than ATC
In the short run if Price > ATC for firms in the industry, other firms will
enter
the industry and:- The industry supply will shiftright
- Equilibrium price willdecrease
- This will keep happening until in the long run P = ATC
When Price is Less than ATC
In the short run if Price < ATC for firms in the industry, other firms will
exit
the industry and:- The industry supply will shiftleft
- Equilibrium price willincrease
- This will keep happening until in the long run P = ATC
Long Run Equilibrium
- In the long run, every firm in perfect competition will produce at the point where P = MC = ATC. This point is also called the long run shutdown point.
- If P < ATC in the long run, firms will eventually have to leave the industry. Example: In the short run if you spent $10,000 on the oven and renovations for your restaurant and you don't recover all that money in the first year you don't have to shut down. But in the long run (2 or 3 years down the line) if you are not able to make enough money to cover those total costs then eventually you will have to shut down.
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Example: Long Run
The diagram above shows a typical firm in a perfectly competitive market. What will be the output and price in the long run?
A) 4 and B
B) 5 and A
C) 6 and 60
D) 3 and C
A
In the long run in perfect competition every firm will break even (0 economic profit). This is when ATC is at its minimum on the graph which is at an output of 4. The price that corresponds to this output is B.
Practice: Long Run
If firms enter a competitive industry, the
Practice: Perfect Competition
Consider a perfectly competitive firm in the following position: the firm produces 4000 units, the market price is $1, fixed costs are equal to $5000, variable costs equal $900, and marginal cost equals $1.10. In order to maximize profit in the short-run the firm should