Answer to Question #287874 in Microeconomics for Mano

Question

Does a competitive firm's price equal the minimum of its average total cost in the short run, in the long run, or both ?

Answer 1

In a competitive firm, the price equals the minimum of average total cost in the long run only. The price maybe greater or less than it's average total cost in the short where it is respectively making profit or losses. If the price equals to the average total cost, it is breaking even. If firms are making profits in the long run, we will have other firms entering the industry, which lowers the price of the good whereas if they are making losses, firms will exit and this rises the price level.