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Managerial Economics
Notes
Figure 9.6
Did u know? All firms in the industry have the same minimum long run average cost.
This, however, does not meant have all firms have the same efficiency.
9.2.2 Long Run Analysis of a Perfectly Competitive Firm
In the long run, all inputs and costs of production are variable and the firm can construct the
optimum or most appropriate scale of plant to produce the best level of output. The best level of
output is one at which price P=LMC equals the long run marginal cost (LMC) of the firm. The
optimum scale of the plant is the one in which short run average total cost (SATC) curve is
tangent to the long run average cost of the firm at the best level of output. If existing firms earn
profits, however, more firms enter the market in the long run. This increases the market supply
of the product and results in a lower product price until all profits are squeezed out. On the other
hand, if firms in the market incur losses, some firms will leave the market in the long run. This
reduces the market supply of the product until all firms remaining in the market just break-
even. Thus, when a competitive market is in long run equilibrium, all firms produce at the
lowest point on their long run average cost (LAC) curve and break-even. This is shown by point
E in Figure 9.7.
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