Price equals the minimum of long-run average cost

Question

Quizplus · Accepted Answer

In a long-run equilibrium, firms are producing at their minimum efficient scale, which corresponds to the point of minimum long-run average cost. At this point, price equals the minimum long-run average cost. In a short-run equilibrium, firms may be producing at a level below their minimum efficient scale, so price may not necessarily equal the minimum long-run average cost. Average revenue equals marginal cost in both short-run and long-run equilibria, but this does not necessarily imply that price equals the minimum long-run average cost. A horizontal long-run supply curve corresponds to a situation where all firms have the same minimum efficient scale and therefore the same minimum long-run average cost, so price would be equal to this minimum. An upward sloping long-run supply curve implies that firms have different minimum efficient scales and therefore different minimum long-run average costs, so price would not necessarily equal the minimum.

Price Equals the Minimum of Long-Run Average Cost