Why don't firms in a competitive market have excess capacity in the long run?

• A. Because government regulations force firms to operate at full capacity.
• B. Because firms produce at the minimum point of their average total cost curve, ensuring efficient use of resources.
• C. Because firms in competitive markets always have monopoly power.
• D. Because demand always exceeds supply in the long run.

Answer: (B)

Verified step by step guidance

1. Understand the concept of excess capacity: Excess capacity occurs when a firm produces less than the output level that minimizes its average total cost (ATC), meaning it is not fully utilizing its productive resources efficiently.
2. Recall the characteristics of a perfectly competitive market in the long run: Firms are price takers, free entry and exit exist, and economic profits are zero due to competition.
3. Analyze the long-run equilibrium condition: In the long run, firms adjust their scale of production so that they produce at the minimum point of their ATC curve, where marginal cost (MC) equals average total cost (ATC) and price (P). This ensures productive efficiency.
4. Explain why this eliminates excess capacity: Since firms produce at the minimum ATC, they are operating at the most efficient scale, meaning no resources are wasted and no excess capacity exists.
5. Contrast with other options: Government regulations or monopoly power are not necessary conditions for no excess capacity in competitive markets, and demand exceeding supply contradicts the equilibrium condition where supply meets demand.