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Long Run Equilibrium Of Firm And Industry

 Long Run Equilibrium of Firm and Industry

(1) Long Run Equilibrium of the Firm

            The long run is an epoch of time in which the firm can vary its plant and scale of operations. Thus in the long run all costs are variable and there are no fixed costs. The firm is in the long run equilibrium under perfect rivalry when it does not necessitate changing its equilibrium productivity. It is earning normal profits, if some of the firms will leave the industry for the reason that every firm must earn normal profits.

            “In the long run, firms are in equilibrium when they have attuned their plant so as to produce at the minimum point to the demand AR curve defined by the market price” so that they earn normal profits.

Postulations

  1. All firms are at liberty to enter into or leave the industry
  2. All firms are of the same competence
  3. All factors are standardised. They can be acquired at invariable and consistent prices
  4. Cost curves of firms are consistent
  5. The plants of firms are equal having given technology
  6. All firms have perfect knowledge about price and productivity

Based on the postulations each firm of the industry will be long run equilibrium when it satisfies the following stipulations.

(1) In equilibrium its short run marginal cost SMC must equal to its long run marginal LMC as well as its short run average cost SAC and its long run average cost LAC and both should equal MR = AR = P. Thus the first condition is as follows:

SMC = LMC = MR = AR = P = SAC = LAC at its minimum point.

(2) LMC curve must cut MR curve from below. Both these conditions of equilibrium are fulfilled at point E as represented in the given figure (3) where SMC and LMC curves cut from below SAC and LAC curves at their minimum point E and SMC and LMC curves cut AR = MR curve below. All curves meet at this point E and the firm produces OQ optimum productivity and sell it at OP price.

Since we presume equal costs of all the firms of industry, all firms will be in equilibrium in the long run. At OP price a firm will have a tendency to neither leave nor enter the industry and all firms will earn normal profits.

(2) Long Run Equilibrium of the Industry

            The industry is in equilibrium in the long run when all firms earn normal profits. There is no incentive for firms to leave the industry or for new firms to enter it. With all factors standardised and given their prices and the same technology, each firm and industry as a whole are in full equilibrium where LMC = MR = AR (=P) = LAC at its minimum. Such an equilibrium position is obtained when the long run price for the industry is determined by the equality of total demand and supply of the industry.

The long run equilibrium of the industry is represented in the figure (4) where long run price OP is ascertained by the intersection of the demand curve D and the supply curve S at point E and the industry is producing OM productivity.

   

At this price OP1 firms are in equilibrium at point A in the figure (5) at OQ level of productivity where LMC = SMC = MR = P (=AR) = SAC = LAC at its minimum. If both the industry is in long run equilibrium each firm in the industry is also in long run equilibrium. If both the industry and the firms are in long run equilibrium they are also in short run equilibrium.

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