Question

In the long-run equilibrium of a competitive market with identical firms, what is the relationship between price P, marginal cost MC,

and average total cost ATC?
(The answer is P=MC, P>ATC)
My question is that, in the long-run, the firm will choose a production quantity where P=MC, and all the firms will produce at their
efficient scale where ATC is the minimum. However, isn't that ATC would be minimum if the ATC curve intersects with MC? In this case,
why isn't MC=ATC?

Answer 1

In a competitive market's long-run equilibrium, firms produce where price equals marginal cost (P=MC) and average total cost (ATC) is minimized, resulting in zero economic profits (P=ATC), while in the short run, price can be above ATC allowing firms to earn profits.

Step-by-step explanation:

In the long-run equilibrium of a competitive market with identical firms, firms will produce the quantity of output where the price (P) equals the marginal cost (MC), and this is also the point where the profit-maximizing rule of producing where marginal revenue (MR) equals marginal cost is met. As for average total cost (ATC), if the market price is above ATC at the profit-maximizing quantity of output, firms will earn an economic profit.

However, in the long run, with free entry and exit of firms, the market price will adjust to the point where P equals the minimum point of the ATC curve, resulting in zero economic profit for the firms. The misunderstanding arises from the distinction between short-run adjustments and long-run equilibrium. In the long-run equilibrium, the firm's marginal cost curve is tangent to the ATC curve at its lowest point, not necessarily intersecting it. This tangency point reflects the efficient scale of production where the firm experiences no economic profit (P=ATC) and continues to produce because it covers all costs, including opportunity costs.