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Long term equilibrium under perfect competition.

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Long term equilibrium under perfect competition.
If firms are perfectly competitive, industry is making short term surplus (profits), more firms will enter the industry. In the long run this will increase the market supply of the product and reduces the market price as well as the profits until all firms in the industry make a normal profit (break even )

Qx = f ( K, R, L )                     

Long run eqm under perfect competition
                    

                 

In the long run equilibrium, the business will be operating at the minimum point on both long - run and short - run average cost curves obtaining full economy of scale. As firms grows larger it is possible for them to reduce their cost of production and it is shown as the declining pert of LRAC.

Diseconomies of scale : as the firm grows in size it will at some point start too experience disequilibrium of scale and is shown aas the rising part of LRAC.

Summary:
Long term equilibrium occurs when price is Po and the business is operating at point E, any increase or decrease in output from point Qo would result in the firm making a loss.

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