Price and output determination under perfect competition in the long run/ Equilibrium of firm and industry under perfect competition in the long run

Long run equilibrium of firm and industry:-

In the long run, the firm can enter or exit from the industry depending on profit or loss situation. If profits are high, new firms enter into the industry and if the firms are in loss, they exit from the industry in the long run. Due to this, abnormal profit and loss situations are ruled out in the long-run and the firms will earn just the normal profit.

The following conditions must be fulfilled in order to attain equilibrium in long-run under perfect competition market:-
  1. The quantity demanded and the quantity supplied must intersect at an equilibrium price.
  2. LMC must be equal to MR.
  3. LMC must intersect MR from below.
It can be shown by the following diagram:-

In the above figure, the industry is in equilibrium where market demand and supply curve intersect each other at point 'E'. The price determined by industry is OP and all the firms accept this price. The firm is in equilibrium at point 'E' where LMC=MR and LMC cut MR from below. LAC is tangent to the MR curve. This shows that the firm operates under normal profit in the long run.

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