5.3 — Perfect Competition in the Long Run

How Markets Adjust Over Time

The long run in perfect competition is a time period where all inputs are variable. Firms can fully adjust their operations, and new firms are free to enter or leave the market. Because there are no barriers to entry or exit, long-run outcomes look very different from short-run outcomes.

Over time, competition eliminates both profits and losses.

What Makes the Long Run Different

In the long run:

• Firms can enter or exit the market

• Businesses can change their scale of production

• Economic profits cannot last

These conditions force the market to move toward balance rather than remaining unstable.

Entry and Exit of Firms

The main force driving long-run change is entry and exit.

When firms earn economic profits:

• New firms are attracted into the market

• Market supply increases

• Prices begin to fall

When firms experience economic losses:

• Some firms leave the market

• Market supply decreases

• Prices begin to rise

This automatic adjustment continues until profits and losses disappear.

Long-Run Equilibrium

Long-run equilibrium is reached when firms earn zero economic profit.

At this point:

• Firms are breaking even

• Price equals average cost

• There is no incentive to enter or exit

Zero economic profit does not mean firms are failing. It means they are earning a normal profit that includes opportunity costs.

How Markets Respond to Demand Changes

Changes in demand temporarily disrupt equilibrium, but competition restores balance.

If demand increases:

• Prices rise in the short run

• Firms earn profits

• New firms enter

• Prices fall back to equilibrium

If demand decreases:

• Prices fall in the short run

• Firms incur losses

• Firms exit

• Prices rise back to equilibrium

No matter the direction of change, the market returns to long-run equilibrium.

Efficiency in the Long Run

Perfect competition is highly efficient over time.

Firms are forced to:

• Produce at the lowest possible cost

• Use resources efficiently

• Avoid waste

This efficiency occurs because firms operate at the minimum point of their average cost curves.

Benefits for Consumers

Consumers benefit directly from long-run perfect competition.

These benefits include:

• Lower prices

• Efficient production

• Fair access to goods and services

Because firms cannot overcharge or restrict output, consumer welfare is maximized.

Key Pricing Conditions

In long-run equilibrium, two important conditions are met:

• Price equals minimum average cost

• Price equals marginal cost

Together, these conditions ensure goods are produced efficiently and sold at fair prices.

Why the Long Run Matters

Long-run analysis explains why competition leads to stable, efficient outcomes. It also helps explain why governments promote competition and regulate markets where competition does not exist.

Understanding long-run behavior completes the picture of how perfectly competitive markets function.