What are the long-run adjustments in a perfectly competitive market?

In the long run, perfectly competitive markets adjust to achieve economic equilibrium, where supply equals demand and normal profits are made.

In a perfectly competitive market, firms are price takers, meaning they have no control over the price of the product they sell. They can only adjust their output levels. In the short run, firms may make supernormal profits (profits above the normal level) or losses. However, these situations trigger market adjustments that lead to economic equilibrium in the long run.

When firms in a perfectly competitive market are making supernormal profits, it attracts new firms to enter the market. This is because the barriers to entry are low in such markets. The increase in the number of firms leads to an increase in the supply of the product, which in turn lowers the market price. As the price falls, the supernormal profits start to diminish. This process continues until the firms are left with only normal profits. At this point, no new firms are attracted to the market, and the existing firms have no incentive to leave. Hence, the market achieves long-run equilibrium.

On the other hand, if firms are making losses, some firms will exit the market. This reduces the supply of the product, causing the market price to rise. As the price rises, the losses start to decrease. This process continues until the firms are left with only normal profits. At this point, no firms have an incentive to leave the market, and no new firms are attracted to the market. Hence, the market achieves long-run equilibrium.

In the long run, all factors of production are variable, allowing firms to adjust their scale of production. Firms will expand or contract their scale of production until they achieve the minimum point on their long-run average cost curve, which is the point of productive efficiency. At this point, firms are producing at the lowest possible cost per unit, and they are making only normal profits. This is another aspect of long-run equilibrium in a perfectly competitive market.

In conclusion, the long-run adjustments in a perfectly competitive market involve changes in the number of firms and changes in the scale of production, leading to economic equilibrium where supply equals demand, firms make normal profits, and firms achieve productive efficiency.

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