Explain the short-run and long-run equilibrium of a firm under perfect competition.

1. 1 · List the features. Many firms, identical product, free entry and exit, perfect knowledge, factor mobility, price taking.
2. 2 · Show industry and firm. [Diagram: industry D and S setting P*; the firm's horizontal P = AR = MR line at P*]
3. 3 · Short-run equilibrium.
   • Produce where P = MC, MC rising
   • Supernormal profit if P > ATC
   • Loss if P < ATC; stay open while P ≥ AVC
   • Shut down if P < minimum AVC
4. 4 · Numerical illustration. P = Rs. 6,000: profit Rs. 3,000; P = Rs. 4,000: loss Rs. 6,000 but stay open; P = Rs. 2,500: shut down.
5. 5 · Long-run adjustment. Profits attract entry and losses cause exit until P = minimum ATC.
6. 6 · Long-run equilibrium diagram. [Diagram: firm with P = MR tangent to the bottom of LAC and SAC, MC passing through that point]
7. 7 · Sri Lankan business link. Tea smallholders and vegetable farmers are price takers at auctions and wholesale markets.
8. 8 · Conclude. Perfect competition delivers allocative and productive efficiency, with only normal profit in the long run.

Scoring tip: Always draw the industry and the firm side by side with the same price line running across both.