Evaluation of Perfect Competition

Firms hardly observe long run equilibrium in real world as the market demand curve changes with a change in tastes, technology, and prices of inputs of production. Nevertheless, the long run analysis helps in explaining entry and exit reasons of firms. The analysis is a yardstick to assess how resources are allocated efficiently in the long run for three reasons. First, the tendency to move towards long run equilibrium leads to the optimal scale of plant and the best level of output of the firm. Second, when capital resources flow in competitive industry due to economic profits, a lower rate of return than the normal rate of return resources will force firms to leave the industry until the remaining resources earn a normal rate of return. Third, production occurs at minimum cost in long run, since long run equilibrium is at minimum LAC. Given the technology available to the firm, entry of new firms results in cost cutting amongst competitors so as to survive in the long run. Moreover, the threat of new entry promotes efficiency by forcing existing firms to minimize costs or be driven out of the market. Thus, economic forces in perfect competition require producers to minimize per unit cost of production. 

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