Answer to Question #226385 in Microeconomics for Busie

Question

With the aid of a diagram, illustrate and explain the firm’s long-run equilibrium position.

Answer 1

A firm reaches equilibrium in the long run when it adjusts its plant(s) to create output at the least point of its long-run Average Cost (AC) curve. This curve is perpendicular to the demand curve indicated by market prices. A company's earnings are normal in the long run. If a company makes abnormal profits in the short term, the industry will attract new companies. As the industry grows, this eventually leads to a decrease in the price of the commodities and an increase in the price of the factors. These modifications continue until the AC curve meets the demand curve at a right angle.

Firms that lose money in the near run, on the other hand, will exit the industry in the long run. As the industry contracts, this results in an increase in price and a decrease in costs. These shifts will continue until the remaining companies in the industry are able to cover their whole costs and make reasonable profits.

The corporation is producing abnormal profits by operating with the plant whose cost is SAC1, and OP is the pricing. As a result, the company has a motivation to expand capacity and progress along its LAC. At the same time, the increased revenues attract new businesses to the industry. As a result, the amount supplied increases, the supply curve shifts to the left, and the price falls until it hits the point OP1. Firms and the industry are in long-run equilibrium at OP1.