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Long run equilibrium

The industry is said to have attained long run equilibrium when:
  • All firms earn normal profits i.e. when all the firms are in equilibrium
  • ƒWhen there is no further entry or exit from the market
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In the long run, AR=MR=LAC=LMC at E. Since E is the minimum point of LAC, the firm produces output at OM at the minimum cost. A firm producing output at optimum cost is called an optimum firm.
In the long run, the market mechanism leads to an optimum allocation of resources. Here:
  • The output is produced at minimum cost
  • ƒConsumers pay minimum possible price which just covers the marginal cost i.e. MC=AR
  • ƒPlants are used at full capacity and there is no wastage of resources i.e., MC=AC
  • ƒFirms earn only normal profits (AC=AR)
  • ƒFirms maximize profits (MC=MR), but the level of profits will be normal
  • ƒIn the long run, LAR=LMR=P=LMC=LAC and there will be optimum allocation of resources

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