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Long-Run Equilibrium in Perfectly Competitve Markets

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Suppose at present, firms in a perfectly competitive market are earning negative economic profits (losses). Explain the process by which this industry will reach long-run equilibrium. What will happen to the output produced by the average firm and the prices charged? Why? What will happen to profit?

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Solution Summary

This solution explains how a perfectly competitive market adjusts when all the firms are taking economic losses. Each step in the process by which this industry will reach long-run equilibrium is explained.

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The attached figure shows a perfectly competitive firm at equilibrium. Its Demand curve touches its Average Total Cost curve at the market price P, so the firm is making an economic profit of zero.

If the Price falls, this firm will begin to ...

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