Economics Perfect Competition Questions
In the long-run equilibrium of a perfectly competitive market, the market is characterized by several key features:
1. Profit maximization: Firms in the market are operating at the point where their marginal cost (MC) equals their marginal revenue (MR), resulting in maximum profits.
2. Zero economic profits: In the long run, firms in a perfectly competitive market earn only normal profits, which means that their total revenue equals their total cost, including both explicit and implicit costs. There are no economic profits or losses in the long run.
3. Entry and exit of firms: If firms in the market are earning economic profits, new firms will be attracted to enter the market. This increases the supply of goods or services, leading to a decrease in prices and reducing the profits of existing firms. Conversely, if firms are experiencing losses, some firms will exit the market, reducing supply and increasing prices. This process continues until all firms in the market are earning only normal profits.
4. Productive efficiency: Firms in a perfectly competitive market produce at the lowest possible average total cost (ATC) in the long run. This ensures that resources are allocated efficiently, and there is no wastage.
5. Allocative efficiency: In the long run, the equilibrium price in a perfectly competitive market is equal to the marginal cost of production. This ensures that resources are allocated to produce the goods or services that society values the most.
Overall, the long-run equilibrium of a perfectly competitive market is characterized by zero economic profits, efficient allocation of resources, and the entry and exit of firms to maintain equilibrium.