Long Period Equilibrium (or Price Determination)

In the long period there will be full equilibrium i.e. each firm will be producing equilibrium output and that there will be on tendency for the new firms to enter the industry or old ones to leave the industry Monopolistic competition resembles perfect competition since there is also free entry and exit of the firm from the industry.

            In the long period there will be full equilibrium i.e. each firm will be producing equilibrium output and that there will be no tendency for the new firms to enter the industry of old ones to leave the industry Monopolistic competition resembles perfect competition since there is also free entry and exit of the firm the industry.

In the long period each firm will have plenty of time to make-to-make efforts to attract the customers of its rivals. Publicity and advertisement, salesmanship are the usual devices used by each firm to attract the customers of the rivals firms. There will be an intense competition among rivals firms. It is possible that any one firm has introduced some new design or packing for its commodity and has attracted some of the customers of its rival firm. The rival firms will also copy such practices. This would increase the competition further. This competition among rival firms would increase their output and as a result of this average cost will increase and the average cost will go to the higher position (or will shift to the right). If there are any abnormal profits, new firms will be attracted and they would share some demand with the firms already in existence. This will shift demand curves (or average revenue curves) facing the existing firms to lower (or shift them to the left) thereby reducing their profits. Free exit of firms from the industry signifies that no firms will earn profits less than normal profits. If any firm is earning less than normal profit, it cannot stay in the long period. Either it must improve or commit suicide.

Thus the point of full equilibrium will be reached where every firm is producing optimum output (i.e. where its MR=MC) and earning just the normal profit. Since each firm is earning normal profit, the competition among the firms will come to an end. The long period equilibrium is illustrated in Fig. 3. Along OX output is shown and along OY price and cost per unit is taken.

This firm will come to equilibrium at point K and produce OM output. It will sell it at price PM per unit and here the marginal revenue. The average revenue curve AR just touches the average cost curve AC at P. This firm is now making only normal gain. The same will be the position of every other firm. This should be remembered that though different firms may be producing different amounts and charging different prices and earning different normal profits but each will have its marginal cost equal to its marginal revenue and its average revenue curve just touching the average cost curve. Thus each firm will earn normal profit because for each firm the price is equal to its average cost.

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