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
Kathryn Graddy: Fishing for perfect competition

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