Azerblazer
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"A firm is making a loss in a perfectly competitive market in the short run. Explain how the firm will reach long run equillibrium position"

Anyone help please ? 😊
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The Financier
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(Original post by Azerblazer)
"A firm is making a loss in a perfectly competitive market in the short run. Explain how the firm will reach long run equillibrium position"

Anyone help please ? 😊
This is just the basic idea behind a perfectly competitive market. Firms come (to obtain supernormal profits as they exist) and go (to cut loss-making production) over time, resulting in a continuous shifting in supply. Therefore, in the long run, the firms in the industry will make an equilibrium level of normal profit.
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Palpatined
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In the short-run, the firm has to be producing at its average variable cost at the least, (also known as the firm's 'Shutdown Price'), to justify staying within the market in the short-run, despite making an overall loss. As firms in Perfect Competition are Price-takers, other firms will leave the market to avoid making heavy losses, therefore the market will have an inward shift in supply. This decrease in supply will eventually increase the price until price = long run average cost. Therefore, firms within the market are making normal profits in the long run. There is no further incentive for the movement of firms in or out of the market, so a long run equilibrium has been established.
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