Question

Explain how output, price, and profit are determined in the long run and explain why perfect competition is efficient?

Answer 1

Long run output- In a firm or company, long run is a period of time at which all production and costs factor are variable.

• Long run average cost decrease, it means that output is increasing.
• When Long run average cost increases company experience a diseconomy of scale.

Long run price - In long run firm, Price will adjust and it is reflect fully change in production cost of firm in long run. When entry or exit in long run firms at this situation price will change by enough to leave company or firm zero economic growth.

Long run profit maximization, Assume

• Firm are identical
• Firm can enter or exit freely
• Constant cost industry

Long run equilibrium

• Quantity of supplied = Quantity of demanded

Why perfect competition is efficient ;

• In competitive market for long run, productive efficiency occurs when the equilibrium output is supplied at low or minimum average cost.
• It is efficient because company or firm produce at lowest average cost possible.