Long run equilibrium for the firm, Managerial Economics


Since there is freedom of entry into the industry the surplus profits will attract new firms into the industry.  As a result the supply of the product will increase and the price will fall.  The individual firm will face a falling perfectly elastic demand curve, and the surplus profits will be reduced. 

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This will go on until the firm is no longer making surplus profits, i.e. when it is just covering its production costs.  At this stage no more firms will be attracted to the industry.  This will happen when the price is equal to the average cost and the demand curve is tangent to the average cost curve at the minimum point.  The firm is said to be making normal profits.

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Posted Date: 11/28/2012 5:09:13 AM | Location : United States

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