IBonomicsPerfect Competition – Long-Run EquilibriumHL
MicroeconomicsA diagram illustrating a perfectly competitive firm in long-run equilibrium, where economic profit is zero, and the firm is operating at its most efficient scale.
Curves and elements
- ar mr
- AR = MR: The perfectly elastic demand curve faced by a firm in perfect competition.
- mc
- Marginal Cost (MC): The cost of producing one additional unit — intersects MR at the profit-maximizing output.
- atc
- Average Total Cost (ATC): The firm's per-unit cost of production — tangent to the demand curve in the long run.
- q
- Quantity (Q): The long-run equilibrium quantity where the firm is both allocatively and productively efficient.
- p
- Price (P): Equal to AR, MR, and ATC — no economic profit is earned.
Key explanations
- 1
In the long run, firms in perfect competition earn normal profit, meaning total revenue equals total cost — including opportunity costs.
- 2
The firm's demand curve (AR = MR) is perfectly elastic because it is a price taker, determined by the industry.
- 3
The firm produces at quantity Q where marginal cost (MC) equals marginal revenue (MR), which is also equal to average total cost (ATC).
- 4
Since price = ATC, the firm earns zero economic profit, which is the defining feature of long-run equilibrium.
- 5
In this state, there is no incentive for firms to enter or exit the market, and resources are allocated efficiently.
Example exam question
Using a diagram, explain how a perfectly competitive firm earns normal profit in the long run. Why is this outcome considered allocatively and productively efficient?
Show example answer
In the long run, firms in perfect competition produce where MC = MR = AR = ATC. This means price equals the average total cost, so the firm earns zero economic profit. The market is allocatively efficient because price equals marginal cost, and it is productively efficient because the firm produces at the lowest point of the ATC curve. There is no incentive for new firms to enter or for existing firms to leave, as all firms are covering their opportunity costs.
