How to Find Long Run Equilibrium Price in Perfect Competition
In a perfectly competitive market, firms are price takers, meaning they have no control over the market price and must accept the price determined by the market. The long run equilibrium price is the price at which the market clears, with no excess supply or demand. Understanding how to find the long run equilibrium price in perfect competition is crucial for firms to make informed decisions about their production and pricing strategies. This article will explore the steps involved in determining the long run equilibrium price in a perfectly competitive market.
Step 1: Understand the Characteristics of Perfect Competition
Before diving into the calculation of the long run equilibrium price, it is essential to understand the key characteristics of a perfectly competitive market. These include:
1. Many buyers and sellers: There are numerous firms and consumers in the market, none of which have a significant market share.
2. Homogeneous products: Products sold by different firms are identical, making it difficult for consumers to differentiate between them.
3. Free entry and exit: Firms can enter or exit the market without any barriers, ensuring that there is no long-term economic profit.
4. Perfect information: Both buyers and sellers have complete information about prices, quality, and availability of products.
5. Price takers: Firms must accept the market price and cannot influence it.
Step 2: Determine the Short Run Equilibrium
The first step in finding the long run equilibrium price is to determine the short run equilibrium. In the short run, firms can earn economic profit, break even, or incur losses. The short run equilibrium is reached when the market price equals the marginal cost (MC) of production.
1. Calculate the marginal cost (MC): The marginal cost is the additional cost incurred by producing one more unit of output. It is typically a U-shaped curve, reflecting the law of diminishing returns.
2. Find the market price: The market price is determined by the intersection of the market supply and demand curves.
3. Compare the market price with the marginal cost: If the market price is above the marginal cost, firms will earn economic profit. If the market price is below the marginal cost, firms will incur losses.
Step 3: Analyze the Long Run Equilibrium
In the long run, firms can adjust their production levels and enter or exit the market. The long run equilibrium is reached when the market price equals the average total cost (ATC) of production, ensuring that firms earn zero economic profit.
1. Calculate the average total cost (ATC): The average total cost is the total cost per unit of output. It is the sum of average fixed cost (AFC) and average variable cost (AVC).
2. Determine the long run equilibrium price: The long run equilibrium price is the price at which the market supply and demand curves intersect, and the market price equals the ATC.
Step 4: Consider the Impact of Market Changes
The long run equilibrium price can be affected by various factors, such as changes in technology, input prices, and consumer preferences. When these factors change, the market supply and demand curves will shift, leading to a new long run equilibrium price.
1. Analyze the impact of changes in technology: Technological advancements can lead to lower production costs, shifting the supply curve to the right and potentially lowering the long run equilibrium price.
2. Consider changes in input prices: An increase in input prices can raise the ATC, shifting the supply curve to the left and potentially increasing the long run equilibrium price.
3. Assess the impact of consumer preferences: Changes in consumer preferences can shift the demand curve, affecting the long run equilibrium price.
In conclusion, finding the long run equilibrium price in perfect competition involves understanding the characteristics of the market, determining the short run equilibrium, analyzing the long run equilibrium, and considering the impact of market changes. By following these steps, firms can make informed decisions about their production and pricing strategies in a perfectly competitive market.
