Long run equilibrium of the firm
A firm is in equilibrium if it adjusts its plant so as to produce at the minimum point of its long run average cost curve which is tangential to the price line. In the long run, the firm will only earn normal profit which is included in the average cost.
If the firm earns super-normal profits, new firms will be attracted to join the industry which leads to a fall in profits. If the firm incurs losses, the existing firms will leave the industry in the long run. This will increase the profits.
The condition for long run equilibrium of the firm is as below:
Long run Marginal Cost (LMC) = Price = Long run Average Cost (LAC).
At equilibrium, the short run marginal cost is equal to the long run marginal cost and the short run average cost is equal to the long run average cost. Thus, in the long run,