In long-run all cost are variable. Because in long run firm can change their fixed factors like land and labor. Under perfect competition, long-run equilibrium occurs when economic profit is zero.
In an industry with economic losses some firms will exit. As those firms leave, the market price rises. At zero economic profit firm will stop exiting from market.
Long run equilibrium of firm can be explained by the following diagram:
At price P1 firm is earning super normal profit. New firms will enter in the market and supply will increase therefore prices will decrease and super normal profit will also come down.
At price P2 firm is earning zero profit or normal profit where its marginal cost (MC) marginal revenue (MR) average cost (AC) are equal. New firms will not enter in the market and existing firms will not leave.
At price P3 where price is low, firm is running into losses. Some firms will exit from the market and supply will decrease and price will increase.
So in the long run equilibrium occurs when economic profit are zero or where marginal cost equals to marginal revenue and average cost.
Equilibrium Of Firm In Short-Run Under Perfect Competition Next Post:
Equilibrium Of Firm Under Monopoly