Recap of Long/Short Run Equilibriums

Throughout all the model types, short and long run equilibriums happen often. A short run equilibrium is a time where a firm can change its output by changing certain factors.  This is often used to earn the most profits, or to avoid losses. It’s also, “a a situation in which, the price is such that that total amount the firms wish to supply is equal to the total amount the consumers wish to demand.”  This puts the producers in a more mutual and beneficial relation.   Long run equilibrium occurs when producers are flexible with their prices.  Unlike short run equilibrium, long run has more adjustments that can be made.  For example, they are able to change their capacity and scale of operations.
There are several assumptions that are made before these equilibrium occur.  For short runs,
  1. All firms in an industry use homogeneous factors of production.
  2. Their costs are equal. Therefore, all cost curves are uniform
  3. They use homogeneous plants so that their SAC curves are equal.
  4. All firms are of equal efficiency
  5. All firms sell their products at the same price determined by demand and supply of the industry so that the price of each firm is equal to AR = MR.
Short run equilibrium must have the MC curve start low and then rise up, as well as having MC=MR.  For the firm to be at an equilibrium and earn profits is to have the difference between total revenue and total cost at a maximum.  
Regarding long run equilibriums:
  1. Firms are free to enter or leave the industry
  2. All firms are of equal efficiency
  3. All factors are homogeneous. They can be obtained at constant and uniform prices.
  4. Cost curves of firms are uniform
  5. The plants of firms are equal having given technology.
  6. All firms have perfect knowledge about price and output.
Firms in long run equilibriums are successful when, “they have adjusted their plant so as to produce at the mini­mum point of their long-run AC curve”. Marginal cost and the price must now equal to the average total cost.
Below are two graphs that depict both short and long run equilibrium:

Sources:





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