Question

What are the conditions of long-run equilibrium of a firm under perfect competition?

Answer 1

For a firm to be in long-run equilibrium under perfect competition, two essential conditions must be satisfied: 

1. LMC = MR = AR = LAC
   • LMC (Long-run Marginal Cost) = MR (Marginal Revenue): This is the profit maximization condition. The firm maximizes profit (or minimizes loss) when marginal cost equals marginal revenue.
   • LMC must cut MR from below to ensure equilibrium is stable.
   • AR (Average Revenue) = LAC (Long-run Average Cost): This means the firm is making normal profit, i.e., just covering its costs (including opportunity costs), with no abnormal/supernormal profit or loss.
2. Tangency at Minimum Point of LAC
   • The point of equilibrium occurs where the firm’s LAC curve is tangent to the price line (AR) at its minimum point.
   • This also implies productive efficiency: the firm produces at the optimum scale of output (lowest cost per unit).