Homework SourseIf a competitive firm is in shortrun equilibrium must it als
Solution
Under Perfect Competition, marginal revenue is same as price.
In short-run, a perfectly competitive firm is in equilibrium, if following condition is fulfilled –
1. MR = MC or,
Price = MC
While in long-run, a perfectly competitive firm is in equilibrium, if following two conditions are fulfilled –
1. MR = MC or P = MC
2. Price = Average cost
In other words, the condition for long-run equilibrium of perfectly competitive firm is as follows –
Price = Marginal cost = Average cost
(a) If a competitive firm is in short-equilibrium then this implies that condition required for short-run equilibrium that is price equals marginal cost is fulfilled.
However, this does not mean that price equals average cost as well because short-run equilibrium do not have any relation with this aspect. Price can be less than or greater than the average cost.
Condition for long-run equilibrium for perfectly competitive firm is as follows –
Price = Marginal cost = Average cost
As short-run equilibrium only specifies equality of price and marginal cost but not of price and average cost or of average cost and marginal cost, it can be said that if a competitive firm is in short-run equilibrium then it may be or may not be in long-run equilibrium.
Thus, it is not necessary that if a competitive firm is in short-run equilibrium, it must also be in long-run equilibrium as well.
(b) Condition for long-run equilibrium with respect to perfectly competitive firm is –
Price = Marginal cost = Average cost
Condition for short- run equilibrium with respect to perfectly competitive firm is –
Price = Marginal cost
If a competitive firm is in long-run equilibrium then this implies that price equals marginal cost equals average cost.
As price equals marginal cost, condition for short-run equilibrium is itself fulfilled.
Hence, if a competitive firm is in long-run equilibrium, it must also be in short-run equilibrium as well.
