Please discuss the longrun equilibrium conditions for 1 firm

Please discuss the long-run equilibrium conditions for: (1) firms in perfect competition and (2) firms in monopolistic competition. How are they similar? How are they different? Is there a significant potential different outcome for a monopoly firm in the long-run?

Please answer in a 500 typed response

Solution

Different market structures have different equilibrium condition both in the short and long run.A firm in a perfectly competitive market has the following long run equilibrium condition:

Short run marginal cost =Long run marginal cost = Marginal Trevenue = Average Revenue = Price = Short run average cost = Long run average cost at its minimum point.Also, LMC curve must cut the MR curve below. Thus, all the fimrs in a perfeclty competitive market equilibrium in the long run earn normal profits and there is no incentive for the firms to leave the industry or new firms to enter the industry.

For a monopolistically competitve firm, the two long run equilibrium conditions are:

1. Marginal Revenue = Marginal cost = Long Run marginal cost (Profit maximization condition)

2. Price = Average revenue = Average cost = Long run Average cost (Zero economic Profit condition)

Thus, as compared to the perfeclty competitive equilibrium in the long run, free entry and exit of firms leads to each firm in a monopolistically industry to earn normal profits, just like in a perfectlet industry.However, unlike a perfeclty competitive firm, a monopolistic firm ends up choosing the output that is below its minimum efficient scale and thus is underutilizing its available resources and thus firm is said to have excess capacity. There is no such excess capacity in a perfectly competitive firm.

A monopoly firm is different form the above two outcomes because a monopolist can earn super normal profits in the long run as well because of restrictions to the entry of new firms in the monopolist market. Thus, lonh run equilibrium condition of the monopolist is - Marginal Revenue = Marginal cost = Long Run marginal cost (Profit maximization condition) and prices are greater than average total cost.