Competitive equilibrium is not achieved when prices are higher than the average long run cost because at this point firms are making surplus profits and this is attracting prospect firms to enter in the market. The competitive market will achieve its equilibrium when the profit equals to zero (Greenhut). When the prices are higher than the average cost in the long run it concludes that production has not been achieved economic efficiency.
Economic inefficiency suggests that resources are not been utilized optimal level to provide satisfaction to the consumers. This inefficiency suggests that the value of the goods that have been produced are more costly than those which are not been manufactured yet. The only way to satisfy this inefficiency is to equate price with the profits. That means we are operating in perfect competition where thousands of firms produces the homogeneous products and earns normal profits. Read also In pure competition, producers compete exclusively on the basis of
In perfect competition there are no barriers to entry and exist and when existing firms are earning supernormal profits in the long run provides an incentive for new firms to enter in the industry (Dewar M. D). Once new firms enter in the market they shift the supply outwards and force the prices to come down until the prices are equal to the long run average costs. At this particular point equilibrium situation exists in the market, and every firm will be earning normal profits.
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