Expected Outcomes in the Industry

Oct 13, 2025 by pynkocean.com 64 views

Understanding the Long-Run Equilibrium in a Competitive Market

In a competitive market, firms operate under the assumption of perfect competition, where no single firm has the power to influence market prices. However, in a real-world scenario, firms may earn economic losses, which can lead to a situation where the industry is not in long-run equilibrium. In this article, we will explore what happens when an industry moves towards long-run equilibrium, ceteris paribus, and which of the following should be expected.

What is Long-Run Equilibrium?

Long-run equilibrium is a state where firms in an industry are earning normal profits, which means their revenue equals their total costs. In this state, firms are neither earning economic profits nor losses. The industry is in a stable position, and firms are not motivated to enter or exit the market.

The Process of Moving to Long-Run Equilibrium

When firms in an industry are earning economic losses, it means that their revenue is less than their total costs. To move towards long-run equilibrium, firms must reduce their costs or increase their revenue. There are several ways firms can achieve this:

Reducing costs: Firms can reduce their costs by becoming more efficient, reducing waste, or negotiating better deals with suppliers.
Increasing revenue: Firms can increase their revenue by increasing prices, selling more units, or expanding their market share.

Expected Outcomes in the Industry

As the industry moves towards long-run equilibrium, several outcomes can be expected:

Price increase: As firms reduce their costs or increase their revenue, they may be able to increase their prices. This is because they are now earning normal profits, and their prices reflect the true value of their products or services.
Exit of firms: If firms are earning economic losses, they may not be able to survive in the long run. As the industry moves towards long-run equilibrium, firms that are not able to reduce their costs or increase their revenue may exit the market.
Entry of new firms: On the other hand, if firms are earning normal profits, it may attract new firms to enter the market. This is because new firms see an opportunity to earn profits in the industry.

In conclusion, when an industry moves towards long-run equilibrium, ceteris paribus, several outcomes can be expected. Firms may increase their prices, exit the market, or attract new firms. The key is to understand the process of moving towards long-run equilibrium and the expected outcomes in the industry.

Based on the analysis above, the correct answer to the question is:

B. A higher price and fewer firms

This is because as firms move towards long-run equilibrium, they may increase their prices to reflect the true value of their products or services. However, firms that are not able to reduce their costs or increase their revenue may exit the market, leading to a decrease in the number of firms in the industry.
Frequently Asked Questions (FAQs) on Long-Run Equilibrium in a Competitive Market

Q: What is the difference between short-run and long-run equilibrium in a competitive market?

A: In a competitive market, short-run equilibrium refers to a state where firms are earning economic profits or losses, while long-run equilibrium refers to a state where firms are earning normal profits.

Q: How do firms move towards long-run equilibrium?

A: Firms can move towards long-run equilibrium by reducing their costs or increasing their revenue. They can achieve this by becoming more efficient, reducing waste, negotiating better deals with suppliers, increasing prices, selling more units, or expanding their market share.

Q: What happens to firms that are earning economic losses in the long run?

A: Firms that are earning economic losses in the long run may not be able to survive. They may exit the market if they are unable to reduce their costs or increase their revenue.

Q: What happens to firms that are earning normal profits in the long run?

A: Firms that are earning normal profits in the long run may attract new firms to enter the market. This is because new firms see an opportunity to earn profits in the industry.

Q: Can firms increase their prices in the long run?

A: Yes, firms can increase their prices in the long run if they are earning normal profits. This is because their prices reflect the true value of their products or services.

Q: What is the relationship between price and the number of firms in the long run?

A: In the long run, a higher price is associated with fewer firms. This is because firms that are not able to reduce their costs or increase their revenue may exit the market.

Q: Can new firms enter the market in the long run?

A: Yes, new firms can enter the market in the long run if they see an opportunity to earn profits. This is because firms that are earning normal profits may attract new firms to enter the market.

Q: What is the significance of long-run equilibrium in a competitive market?

A: Long-run equilibrium is significant in a competitive market because it represents a state where firms are earning normal profits. This is a stable position for the industry, and firms are not motivated to enter or exit the market.

Q: How can firms achieve long-run equilibrium?

A: Firms can achieve long-run equilibrium by reducing their costs or increasing their revenue. They can achieve this by becoming more efficient, reducing waste, negotiating better deals with suppliers, increasing prices, selling more units, or expanding their market share.

Q: What are the expected outcomes in the industry when it moves towards long-run equilibrium?

A: The expected outcomes in the industry when it moves towards long-run equilibrium include a higher price, exit of firms, and entry of new firms.