Long-run Equilibrium of Fin” and Group Equilibrium
We have seen above that the firms under monopolistic competition can earn supernormal prolit in the short-run. But. in the long-run, such profits disappear, This is because we assume that entry is free and new firms will enter the industry. if the existing firms are making supernormal profits. As new Firms enter and start production. supply will increase and Ihe pnl average revenue curve faced by the finu will shift to the left. and. therefore. the supernormal Irnr. its will be competed away and the firms will heThing only normal profits. If. in the short-run, firms arc realising losses. then. in the long-run. some firms will leave the industry so that the remaining firms will be earning normal profits. Another point which is to be noted in regard to the long-run equilibrium is that average ill the long-run will be more elastic (i.t Latter), since large number uf substitutes will be available in the long-run. Therefore. in the long-run, equilibrium is established when firms are earning only normal profits, Now profits are normal only when Average Revenue = Average Cost. Therefore, there is equilibrium in the lung·run under lIlonopuli~tic competition when Average Revenue =average revenue curve (AR) is a tangent 10 the average cost curve (LAC) at P. Therefore. the equilibrium output in the long-run is OM and the corresponding price is MP (= OP’). At this point. average cost is alsu MP and so is avcrec revenue, Therefore, there are nu supernormal profits: there are only the normal profits which form pau of the cost of production.
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