Perfect Competitive Market Model
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In long-run competitive equilibrium, each firm produces the output at which marginal cost equals price. No firm can change its output in the short run and make more profit. And each firm is producing at minimum long-run average cost (point m on LRAC). So no firm has an incentive to expand or contract its production plant- a bigger plant or a smaller plant will lead to a higher long-run average cost and an economic loss. Finally, no firm has an incentive to leave the industry or to enter it.
Industries are constantly discovering lower-cost techniques of production. Most cost-saving production techniques cannot be implemented, however, without investing in new plant and equipment. As a consequence, it takes time for technological advance to spread through an industry. Some firms whose plants are on the verge of being replace will be quick to adopt the new technology, while other firms whose plants have recently been replaced will continue to operate with an old technology until they can no longer cover their average variable cost. Once a average variable cost cannot be covered, a firm will scrap even a relatively new plants in favor of a plant with new technology.
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