00:01
So let's talk about what long run equilibrium looks like in perfect competition.
00:04
First of all, right, no profits.
00:07
You can't have profits because otherwise entry happens, right? if your industry makes profits, it means that other firms are in the process of entering your industry.
00:19
And if the industry is changing dynamically like that, you're not an equilibrium, right? you also know that price is equal to the minimum of the long run average cost.
00:29
Again, otherwise undercut undercutting is going to happen, right? if firms are not charging a price consistent with the minimum cost business model, other firms can enter with the correct business model, offer a lower price, and make a profit, and that, again, these sorts of dynamic changes are inconsistent with the the nature of long run equilibrium, right? if there was sort of price wars and entry and dynamic changes happening to industry, we wouldn't be an equilibrium, right? the other thing we know is that price is equal to marginal cost from firm optimization, right? if firms are not setting price equal to marginal cost, then something is very wrong because firms are not behaving rationally, right? if the price is greater than your marginal cost, obviously you want to expand output.
01:29
But if firms are expanding their output, then again, the industry is not an equilibrium as production dynamics are still occurring.
01:38
So a is correct.
01:41
It is correct.
01:42
Price equals to mc implies that firms are content where they are.
01:48
This is the condition that tells you that a is correct, right? and again, long run equilibrium, of course, means.
01:56
That firms are not changing their quantities...