Economics Perfect Competition Questions Medium
The long-run equilibrium condition in perfect competition is achieved when the market is in a state of equilibrium in the long run. This means that all firms in the industry are earning zero economic profit, and there are no incentives for firms to enter or exit the market.
In order for this condition to be met, several factors must be present. First, there must be a large number of buyers and sellers in the market, with no individual firm having the ability to influence the market price. This ensures that each firm is a price taker and must accept the prevailing market price.
Second, there must be perfect information available to all market participants. This means that buyers and sellers have complete knowledge about the market conditions, including prices, quality, and availability of goods or services.
Third, there must be free entry and exit in the market. This means that there are no barriers to entry or exit for firms, allowing new firms to enter the market if they see an opportunity for profit, and existing firms to exit if they are incurring losses.
Finally, all firms in the market must be producing at their efficient scale, where they are maximizing their output and minimizing their average total cost. This ensures that resources are allocated efficiently and that there is no excess capacity or wastage in the industry.
When all these conditions are met, the market reaches a long-run equilibrium where price equals marginal cost, and each firm earns only normal profit, covering all its costs including opportunity costs. This equilibrium is characterized by productive efficiency, allocative efficiency, and dynamic efficiency, leading to the optimal allocation of resources in the economy.