Title: Pure Competition: Long-Run Equilibrium
Headings: Pure Competition: Long-Run Equilibrium
Pure Competition: Long-Run Equilibrium
Average Total Cost = Marginal Cost = Market Price
Productive And Allocative Efficiency Under Pure Competition

Content: If the firms are suffering losses, then some firms will leave the market, reducing the market supply, thereby increasing prices, which will allow the existing firms to earn a normal profit. The long-run market price equals the minimum average total cost ( ATC) of producing the product. And since suppliers will produce until marginal cost = market price, the long-run equilibrium in a purely competitive market can be summarized thus: Average Total Cost = Marginal Cost = Market Price
A firm maximizes profit when it's marginal revenue ( MR) equals its marginal cost ( MC) equals the average total cost ( ATC ). For a competitive firm, MR equals the market price. When market demand increases, prices rise, causing the MR to exceed ATC, allowing the firm to earn an economic profit proportional to the increased demand. For the industry, if the market demand increases from D 1 to D 2, then firms within the industry will be able to make economic profits. Other firms will enter the industry, increasing supply from S 1 to S 2, causing lower prices until the economic profits are again reduced to 0. When market demand declines, MR declines below MC, which causes firms to suffer temporary losses, because they must lower their prices below their ATC, causing less efficient producers to exit the market. Consequently, the supply declines and market prices rise again, until MR = MC = ATC.