Equilibrium in tile Long-Run
The long-fill is a period of time long enough tu permit changes in the variable as well as in the fixed factors. In the long run, accordingly, all fat.:tor~ arc variable and none fixed. Thus, in the lung-run, firms can change their output by increasing their fixed equipment. They can enlarge the old plants or replace them by new plants or add new plants. Moreover, in the long-rm, new firms can also enter the industry. On the contrary. if the situation ~ll dcnu ls in the long- ITn, finns can diminish their fixed cquipmcuts by allowing them to wear out without replacement and the existing finns can leave the industry. Thus, the long-run equilibrium will refer to a situation where free and full scope for adjustment has been allowed to economic forces. In the long-run. it is the long-run average and marginal cost CURVES which arc _ relevant for making output decisions. 1-urther. in the long-n n, average variable cost is of no particular relevance. It is the average total cost which is of determining importance, since in the long-rrn all costs arc variable and none fixed.
We have discussed above that in the short-run a firm under perfect competition is in equilibrium at that
output at which marginal cost equals pncc (or Marginal Revenue). This is equally valid in the long-fin, But, in the long-run for a perfectly competitive linn to be in equilibrium, besides marginal cost being equal to price, price must alsu he equal to’ average cos]. If the price is greater than the average cost, the fit ms will be making supernormal profits. Lured by these subcoronal profits, new finns will enter the industry and these extra profits will he competed away. When of the industry will increase and hence the price of the down to the level OP at which price, the firm output will be forced down. The new firms will keep equilibrium at R and is producing OM output. At point coming into the industry until the price is depressed R or equilibrium output OM. the price is equal to down to average cost, and all firms arc earning only average cost, and hence the linn will be earning only normal profits. normal profits (normal profits are included in average cost). Therefore, at price 01′, there will be no tendency for the outside firms to enter. Hence. the firm will be in equilibrium at OP price and OM output. On the other hand. if the price happens to be below the average cost, the firms will be incurring
losses. Some of the existing firms will quit the industry. As a result, the output of the industry will decrease and the price will rise to equal the average cost so that the firms remaining in the industry are making normal profits. Hence. in the long-rrn, firms need not be forced to produce at a loss since they can leave the industry, if they arc having losses. Thus, for a perfectly competitive firm to be in equilibrium in the long-rrn, the following two conditions must be satisfied.