Skip to main content

Understanding Long-Run Equilibrium and Supply in Perfect Competition

In the realm of economics, understanding the concepts of long-run equilibrium and supply is crucial. This article aims to provide a comprehensive explanation of these concepts, particularly in the context of perfect competition.

Perfect Competition

Perfect competition is a market structure characterized by many buyers and sellers. In such a market, each firm is a price taker, meaning no single firm can influence the price of goods. The goods offered by various sellers are largely identical, and firms can freely enter or exit the market.

Revenue of a Competitive Firm

The revenue of a competitive firm is calculated as follows:

  • Total Revenue (TR): This is the total income from selling a product, calculated as Price (P) times Quantity (Q), i.e., TR = P * Q.
  • Average Revenue (AR): This is the total revenue divided by the quantity of the product sold, i.e., AR = TR / Q.
  • Marginal Revenue (MR): This is the change in total revenue from selling one more unit of a product. In many cases, marginal revenue is the same as the price of the product.

Profit Maximization

To maximize profit, firms aim to set marginal revenue equal to marginal cost. This is a key concept in economics and is applicable even in monopolistic markets. If a firm’s marginal revenue is known, setting it equal to the marginal cost will lead to profit maximization.

Short-Run Decisions

In the short run, firms make the decision to shut down if the total cost is greater than the total revenue. However, as long as they’re covering their total variable costs, they’ll stay open, even if they’re not meeting their total fixed costs. This is because total fixed costs are considered sunk costs and are not a concern in the short run.

Long-Run Decisions

In the long run, firms make the decision to exit the market if the price is less than the average total cost. During this period, firms can focus on total fixed costs.

Conclusion

In conclusion, understanding the concepts of long-run equilibrium and supply in perfect competition is essential for anyone studying economics. By following the recommended resources and activities, one can gain a solid grasp of these concepts.

Labels:

Popular posts from this blog

Terms of Use

Th e information here is presented as an education tool for individuals seeking to educate themselves on topics of investing and personal finance.  Do not interpret the information provided here as authoritative investment advice. MJ Industries is not a financial advisor and no opinions or information provided should be construed as investment advice. No author of this site is directly compensated for any information presented on this blog. You should always consult a qualified financial professional before investing.  Any past performance is no guarantee of our future returns and most likely variant on where and when value is found. Reproduction or use of any material written of this site is strictly prohibited.
Read more

Government's Role in Economics: Navigating Benefits, Challenges, and Failures

Introduction: In the realm of economic studies, understanding the role of government is paramount. While the focus of many examinations may revolve around chapters one to three, delving into chapter five provides insights into the government's power, potential benefits, and the challenges it encounters. This article aims to explore the economic advantages of government coercion, the difficulties in managing and directing governmental actions, and the occurrence of government failures. Government Coercion for Economic Benefit: At the core of government intervention lies the ability to coerce through transactions. An example of this coercion is the government's authority to reject mergers, as demonstrated when the merger of major banks, such as RBC, was denied to prevent anti-competitive practices. This form of intervention ensures fair competition and prevents entities from exploiting consumers. Challenges in Managing Government: Despite the potential benefits of government inte...
Read more

Bridging the Productivity Gap: How Skilled Trades Training Can Revitalize Canada's Economy

*Introduction:* Canada's productivity growth has been stagnant for decades, lagging behind other developed economies. This trend has significant implications for the country's competitiveness, economic growth, and standard of living. While various factors contribute to this issue, a crucial solution lies in investing in skilled trades training. This article explores how addressing the shortage of skilled tradespeople can help bridge Canada's productivity gap. *The Productivity Problem:* Canada's productivity growth has averaged only 1% annually since 2000, compared to 2.5% in the United States. This disparity translates to reduced economic growth, lower competitiveness, and decreased investment in innovation. The Conference Board of Canada estimates that if Canada's productivity growth had kept pace with that of the United States, the country's GDP would be approximately 20% higher today. *The Skilled Trades Shortage:* A significant contributor to Canada's p...
Read more