{"id":733,"date":"2019-10-10T20:04:00","date_gmt":"2019-10-10T20:04:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=733"},"modified":"2026-01-16T08:34:37","modified_gmt":"2026-01-16T08:34:37","slug":"factors-affecting-long-run-equilibrium-under-each-market-structure","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/factors-affecting-long-run-equilibrium-under-each-market-structure\/","title":{"rendered":"Factors Affecting Long-run Equilibrium Under Each Market Structure"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Profit-maximizing condition for a monopoly\",\n    \"text\": \"A monopoly most likely profits when:\\n\\nA. price equals marginal cost (P = MC);\\n\\nB. marginal revenue equals average total cost (MR = ATC); or\\n\\nC. marginal revenue equals marginal cost (MR = MC).\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"C. Marginal revenue equals marginal cost (MR = MC).\\n\\nA monopolist maximizes profit by producing the level of output where marginal revenue equals marginal cost. At this output level, the monopolist then charges a price above marginal cost, allowing it to earn economic profit. This MR = MC condition is the general profit-maximization rule for all firms, regardless of market structure.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"A. Price equals marginal cost (P = MC).\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"B. Marginal revenue equals average total cost (MR = ATC).\"\n      }\n    ]\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"@id\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/images\/monopolistic-markets\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e.png\",\n  \"contentUrl\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15l-e.png\",\n  \"caption\": \"Monopolistic markets\",\n  \"width\": 1671,\n  \"height\": 1364,\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    \"url\": \"https:\/\/analystprep.com\/\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"@id\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/images\/optimal-price-perfect-competition\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15k-e.png\",\n  \"contentUrl\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/15k-e.png\",\n  \"caption\": \"Optimal price in perfectly 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    \"url\": \"https:\/\/analystprep.com\/\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"The Firm and Market Structures (2022 Level I CFA\u00ae Exam \u2013 Reading 9)\",\n  \"description\": \"This video lesson covers the four main types of market structures\u2014monopoly, oligopoly, monopolistic competition, and perfect competition\u2014highlighting their characteristics, pricing power, barriers to entry, and long-run profitability. It also explains marginal cost and revenue relationships, kinked demand curves, profit maximization strategies, and market concentration metrics like the HHI and concentration ratios.\",\n  \"uploadDate\": \"2019-06-11T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/PBMOxv2e3QU\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=PBMOxv2e3QU\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/PBMOxv2e3QU\",\n  \"duration\": \"PT21M26S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/PBMOxv2e3QU?si=w5JABZ4C8t1T7ICf\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\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 style=\"background: white; margin: 0in 0in .25in 0in;\">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 style=\"background: white; margin: 0in 0in .25in 0in;\">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 style=\"background: white; margin: 0in 0in .25in 0in;\">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>As a result, the economic profits realized by monopolistically competitive firms will fall. Further, firms will incur advertising costs for product differentiation. This can be seen from consumer products such as clothing, in which advertising costs are quite high. For example, large sporting brands pay lucrative contracts to professional sports personalities to differentiate themselves from the competition.<\/p>\n<h2><strong>Oligopoly Markets<\/strong><\/h2>\n<p>In the long run, there is a possibility for economic profits in oligopoly markets. 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 as a way of maintaining market leadership. For example, Shell\u2019s gasoline is said to 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\u00a0<\/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); or<\/p>\n<p>C. marginal revenue equals marginal cost (MR = MC).<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is C.<\/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,\u00a0 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\"><hr \/>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>","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":3,"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-733","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>Factors Affecting Long-Run Equilibrium | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Explore how market structures like monopoly, oligopoly, and perfect competition influence long-run equilibrium and profitability.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link 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