Perfect Competition - Adjusting to Long Run… | tutor2u Economics
Study notes

Perfect Competition - Adjusting to Long Run Equilibrium

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB

An adjustment process takes place in perfectly competitive markets depending on the scale of profits earned in the short run

Perfect Competition in the Long-run - Revision Video

Adjustment to Long-run Equilibrium in Perfect Competition

  • If most firms are making abnormal profits in the short run, this encourages the entry of new firms into the industry
  • This will cause an outward shift in market supply forcing down the price
  • The increase in supply will eventually reduce the price until price = long run average cost. At this point, each firm in the industry is making normal profit.
  • Other things remaining the same, there is no further incentive for movement of firms in and out of the industry and a long-run equilibrium has been established. This is shown in the next diagram

An increase in market supply

  • The effect of increased market supply is to lower the price and cause an expansion along the market demand curve.
  • But for each supplier, the price they “take" is now lower and it is this that drives down the level of profit made towards normal profit equilibrium.
  • Competition drives down the market price reducing the profitability of each remaining business in the market
The effects of an outward shift of market supply

Subscribe to email updates from tutor2u Economics

Join 1000s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning.

You can also follow @tutor2uEconomics on Twitter, subscribe to our YouTube channel, or join our popular Facebook Groups.

Job board

Economics Contributor

tutor2u, On-line

Related Collections

Teaching Vacancies

Recruitment

Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›

Advertise your teaching jobs with tutor2u

A New Home for tutor2u Resources

We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores.

For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

Simply add the required resources to your cart, checkout using the usual options and your resources will be available to access immediately via your mytutor2u account.