{"id":31526,"date":"2021-09-24T19:17:21","date_gmt":"2021-09-24T19:17:21","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=31526"},"modified":"2026-03-31T10:30:04","modified_gmt":"2026-03-31T10:30:04","slug":"long-run-equilibrium-under-each-market-structure","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/long-run-equilibrium-under-each-market-structure\/","title":{"rendered":"Long-run Equilibrium Under Each Market Structure"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n\n  \"name\": \"The Firm and Market Structures (2023 Level I CFA\u00ae Exam \u2013 Economics \u2013 Module 2)\",\n\n  \"description\": \"This video lesson covers the characteristics of different market structures, including perfect competition, monopolistic competition, oligopoly, and pure monopoly. It explores price, revenue, and cost relationships, supply functions, optimal pricing, long-run equilibrium, and pricing strategies. Additionally, it discusses concentration measures and how to identify a firm's market structure.\",\n\n  \"uploadDate\": \"2022-03-10T00:00:00+00:00\",\n\n  \"thumbnailUrl\": \"https:\/\/analystprep.com\/default-thumbnail.jpg\",\n\n  \"contentUrl\": \"https:\/\/youtu.be\/GSN7qkO2e-g\",\n\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/GSN7qkO2e-g\",\n\n  \"duration\": \"PT32M49S\",\n\n  \"publisher\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\",\n    \"logo\": {\n      \"@type\": \"ImageObject\",\n      \"url\": \"https:\/\/analystprep.com\/default-logo.jpg\",\n      \"width\": 600,\n      \"height\": 60\n    }\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"A monopoly most likely profits when:\",\n    \"text\": \"A monopoly most likely profits when:\\nA. price equals marginal cost (P=MC).\\nB. marginal revenue equals average total cost (MR = ATC).\\nC. marginal revenue equals marginal cost (MR = MC).\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is C. To arrive at the monopolist\u2019s profit maximizing level of output, its marginal revenue is equated to its marginal cost. This, indeed, is the same profit-maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output.\\n\\nIn fact, the condition that marginal revenue equals marginal cost is used to determine the profit-maximizing level of output of every firm. This is the case regardless of the market structure in which a firm operates. However, the monopolist charges a price that is higher than where the marginal revenue curve and marginal cost curve intersect, creating room for economic profit.\"\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15k-e.png\",\n  \"caption\": \"Optimal Price in Perfectively Competitive markets\",\n  \"width\": 1553,\n  \"height\": 1064,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2021\/09\/econ6.jpg\",\n  \"caption\": \"Long Run Equilibrium Under Each Market Structure\",\n  \"width\": 449,\n  \"height\": 345,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e-768x627.png\",\n  \"contentUrl\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e-768x627.png\",\n  \"caption\": \"Monopolistic Markets\",\n  \"width\": 768,\n  \"height\": 627,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n\n\n<p><iframe loading=\"lazy\"\n  width=\"611\"\n  height=\"344\"\n  src=\"https:\/\/www.youtube.com\/embed\/GSN7qkO2e-g\"\n  title=\"YouTube video player\"\n  frameborder=\"0\"\n  allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\"\n  referrerpolicy=\"strict-origin-when-cross-origin\"\n  allowfullscreen>\n<\/iframe>\n<\/p>\n<p>A firm is said to be at equilibrium if the marginal cost (MC) is equal to marginal revenue (MR), and that is the profit-maximizing level of output.<\/p>\n<h2><strong>Perfectly Competitive Markets<\/strong><\/h2>\n<p>In the long run, if firms under perfectly competitive markets start earning higher profits, more entrepreneurs will be attracted to such business ventures. As a result, production will increase. This translates to an increase in the aggregate supply. Consequently, the supply curve will shift outwards the right. When the supply curve shifts to the right, the equilibrium price will fall to the same demand curve.<\/p>\n<p>In the long run, all firms will operate at a point where marginal cost (MC) intersects at the lowest level on the average total cost (ATC) curve.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-10151\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15k-e.png\" alt=\"\" width=\"1553\" height=\"1064\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15k-e.png 1553w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15k-e-300x206.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15k-e-768x526.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15k-e-1024x702.png 1024w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15k-e-400x274.png 400w\" sizes=\"auto, (max-width: 1553px) 100vw, 1553px\" \/><\/p>\n<p>This means that new firms entering the market won&#8217;t post profits at this point from an economic profit standpoint because total revenue equals total cost. In the long run, perfectly competitive markets operate at practically zero economic profit. Also, note that the demand curve at this point is perfectly elastic. This elasticity is represented by a horizontal line.<\/p>\n<h2><strong>Monopolistic Competitive Markets<\/strong><\/h2>\n<p>As firms under this market structure start reporting higher profits, more firms will venture into the market. Since entrant prices are low, customers will shift to buying products from these new firms. This will reduce the demand for firms that produce similar goods.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-39617 aligncenter\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2021\/09\/econ6.jpg\" alt=\"\" width=\"449\" height=\"345\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2021\/09\/econ6.jpg 449w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2021\/09\/econ6-300x231.jpg 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2021\/09\/econ6-400x307.jpg 400w\" sizes=\"auto, (max-width: 449px) 100vw, 449px\" \/><\/p>\n<p>With the entry of new firms, the demand curve experienced by each firm is shifted so that price is equal to the average total cost (P=ATC), resulting in zero economic profit.<\/p>\n<p>MR=MC in monopolistic competitive markets implies the firm will continue to produce the same quantity, but it will no longer earn positive economic profits.<\/p>\n<p>As a result, the economic profits realized by monopolistically competitive firms will fall. Further, firms will incur advertising costs for product differentiation.<\/p>\n<h2><strong>Oligopoly Markets<\/strong><\/h2>\n<p>There is a possibility for economic profits in oligopoly markets in the long run. However, the market share of a dominant firm will decline in the long run. As is always the case, profits will attract more firms to enter the oligopoly market.<\/p>\n<p>Marginal costs incurred by entrant firms fall. Likewise, the profitability of the dominant firm declines. The reactions of entrant firms are included in the optimal pricing strategy.<\/p>\n<p>Some firms may decide to incorporate innovation to maintain market leadership. For example, Shell&#8217;s gasoline helps clean the engine valves and fuel injectors. However, these innovations are usually not very effective at maintaining the market share of the dominant firm.<\/p>\n<h2><strong>Monopolistic Markets<\/strong><\/h2>\n<p>Monopolies can make economic profits even in the long-run. This is because the long-run equilibrium creates room for every input to change. A monopoly must be protected by entry barriers.<\/p>\n<p>For monopolies that are regulated, there exist a number of solutions to long-run equilibrium. Below are a few examples of the solutions.<\/p>\n<ul>\n<li>Setting the price to be equal to the marginal cost, just like in perfectly competitive markets.<\/li>\n<li>The monopoly can be owned by a nation (country, state, province, etc.). The economic profit can then be used to finance social programs such as health services.<\/li>\n<li>Tasking a governmental entity with the responsibility of regulating an authorized monopoly. This can be seen in Canada with regulatory bodies overseeing state-owned energy producers.<\/li>\n<li>Franchise-bidding for natural monopolies.<\/li>\n<\/ul>\n<blockquote>\n<h2>Question<\/h2>\n<p>A monopoly <i>most likely&nbsp;<\/i>profits when:<\/p>\n<p>A. price equals marginal cost (P=MC).<\/p>\n<p>B. marginal revenue equals average total cost (MR = ATC).<\/p>\n<p>C. marginal revenue equals marginal cost (MR = MC).<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>C<\/strong>.<\/p>\n<p>To arrive at the monopolist&#8217;s profit maximizing level of output, its marginal revenue is equated to its marginal cost. This, indeed,&nbsp; is the same profit-maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output.<\/p>\n<p>In fact, the condition that marginal revenue equals marginal cost is used to determine the profit-maximizing level of output of every firm. This is the case regardless of the market structure in which a firm operates. However, the monopolist charges a price that is higher than where the marginal revenue curve and marginal cost curve intersect, creating room for economic profit.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter size-full wp-image-10157\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e.png\" alt=\"monopolistic-markets\" width=\"1671\" height=\"1364\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e.png 1671w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e-300x245.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e-768x627.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e-1024x836.png 1024w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e-400x327.png 400w\" sizes=\"auto, (max-width: 1671px) 100vw, 1671px\" \/><\/p>\n<\/blockquote>\n<div class=\"notes_inv\">\n<p>&nbsp;<\/p>\n<\/div>\n\n\n","protected":false},"excerpt":{"rendered":"<p>A firm is said to be at equilibrium if the marginal cost (MC) is equal to marginal revenue (MR), and that is the profit-maximizing level of output. Perfectly Competitive Markets In the long run, if firms under perfectly competitive markets&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-31526","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Long-Run Equilibrium in Market Structures | CFA Level 1<\/title>\n<meta name=\"description\" content=\"In long-run equilibrium, firms maximize profit where marginal cost equals marginal revenue, with outcomes varying by market structure.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link 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