Short-run and long-run equilibrium

Key Questions

  • Answer:

    Refer Explanation section


    Long run equilibrium under Monopolistic Market

    You must understand –

    There are a large number of firms producing similar products.

    One firm’s action has least effect on other firms.

    There is free entry of firms.

    One more assumption is that all the firms are under identical cost and demand conditions.

    In the long run, allured by the supernormal profit enjoyed by the existing firms new firms enter into the industry. As all the firms compete for the same kind of factors, the factor price goes up. Production cost of all the firms go up. Ultimately all the firms in the industry will earn only normal profit in the long run.

    It is determined where Long-run Marginal Cost(LMC) curve cuts Marginal Revenue (MR) curve from below. In the graph, it is at E . The equilibrium output is OM. Equilibrium price is OP or MQ. A monopolistic firm in the long run will earn only normal profit. Hence at the point of equilibrium Average Revenue (AR) is equal to Average Cost (AC).