Question

Long-run equilibrium of the firm under perfect competition is only at the optimum output level.

A firm under perfect competition operates at the minimum point on the long-run average cost. Explain.

Answer 1

• In the long term, a firm with perfect competition may change all production characteristics and select the most efficient operational scale.
• The firm reaches equilibrium when Long-Run Marginal Cost (LMC) equals Marginal Revenue (MR), and LMC intersects MR from below. Because in perfect competition, MR = Price, the company determines LMC = Price.
• In long-run equilibrium, the business produces at the lowest point on its Long-Run Average Cost (LAC) curve, which shows the optimal output level the most efficient point of production.
• At this point, the corporation earns a typical profit, which means that total income only covers total costs, including the standard return on capital.
• If any firm produced at a greater or lower cost than the LAC minimum, it would either incur losses or leave potential profits unpaid, requiring modifications until all enterprises function at this optimum output level.