Equilibrium of industry and firm in the long period

Equilibrium of industry and firm in the long period

            In the long run, time is long enough to adjust the supply with the changing demand. Firms can expand or contract their size and new ones can also sprung up. In the long run, the firm may vary its output not only by varying the rate of use of its existing plant but also by simultaneously varying the size of the paint for the purpose.

            According to Prof Watson, "When the firms in a purely competitive industry earn zero net profit, the number of firms is in equilibrium,(no entry of firms and no withdrawal of firm) therefore, the output of the industry is in equilibrium there being no force causing the output of the industry either to expand or to contract."

            A firm is in the long period equilibrium when it is neither making abnormal profits nor is suffering losses. The equilibrium of the firm will be attained when the marginal cost equates marginal revenue, average cost and average revenue, i.e. MC = MR = AR = Price.

Fig. Explains the equilibrium of the firm that is attained at point R where the long run marginal cost equates the marginal revenue. It is significant to note that at the equilibrium point the AC is also equal to AR. This will mean that the firm will neither make abnormal profits nor suffer losses.  

            The aforementioned discussion makes it clear that the concept of perfect competition may be hypothetical, but to understand the fundamental theory of price determination its study is indispensable.