Explain Alfred Marshall’s theory of a long run (long period) competitive equilibrium (the
theory still used to this day to explain the long-run outcome of perfectly competitive markets).
What is the relationship between the price of a commodity and its unit cost in the long run? What
are the processes that force market prices toward that long run outcome? Does utility play a role
in the determination of price in the long run?
The long-run model shows that production levels can be changed because their exists an equilibrium between supply and demand. The long-run model shows that companies can feel at liberty to adjust any costs or enter or leave a market depending on profit analysis. In a long-run, prices will decrease because supply increases. However, over the long-run, suppliers will also increase prices of raw materials to earn more profit from the increase in supply, which will lower production levels and raise prices. Hence, over the long-run, inflation will also occur as a result of increased demand.