Lesson preview · Competitive Market Equilibrium
Long-Run: Zero Profit
~6 min · Free to read
The defining feature of long-run competitive equilibrium is zero economic profit. Free entry and exit drives this result. If firms earn positive profit, new firms enter, supply increases, and price falls until profit is zero. If firms suffer losses, firms exit, supply decreases, and price rises until losses are eliminated.
Key Term
Long-Run Competitive Equilibrium
In the long run: . Firms produce at the efficient scale. Economic profit is zero (but firms still earn normal profit — the opportunity cost of being in this business is covered).
Tip
Two flavours of efficiency
The identity packages two efficiency results:
- Allocative efficiency () — the price consumers pay for the last unit equals the cost of producing it. No mutually beneficial trade is left on the table.
- Productive efficiency () — each firm produces at the bottom of its average-cost curve. No waste in production.
We’ll measure these gains formally in the next unit, when we cover consumer and producer surplus.
Zero economic profit does NOT mean zero accounting profit. Economic profit accounts for opportunity costs — the return the owner could earn in their next-best alternative. When economic profit is zero, the firm earns just enough to keep its resources in their current use. This is normal profit, and it’s embedded in total cost.
In long-run equilibrium, price equals marginal cost and the minimum of average total cost
Worked Example
A competitive market is in long-run equilibrium. Each firm has dollars at . Market demand is . How many firms are in the market?
Check yourself · no marks
If zero economic profit means the firm is ‘just breaking even,’ why doesn’t the owner just quit?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
In long-run competitive equilibrium, economic profit is zero because:
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