Enjoying the long run

158 Part III: Market Structures and the Decision-Making Environment

The long-run equilibrium price equals $60.00. So the firm earns zero economic profit by producing 500 units of output at a price of $60 in the long run.

Firms have no difficulty moving into or out of a perfectly competitive market. If economic profit is greater than zero, your business is earning something greater than a normal return. This profit attracts other firms to enter the market. This situation is illustrated in Figure 9-6. At the initial price PA, your firm maximizes profits at qA based on marginal revenue equals marginal cost. At qA, your firm earns positive profit because price is greater than average total cost. This profit provides incentive for new firms to enter the market, increasing the market supply from SA to SLR. The entry of new firms results in a lower equilibrium price for the good, PLR. As price decreases, your profitmaximizing quantity moves to qLR and your economic profit moves toward zero because price now equals average total cost. When economic profit reaches zero, no one has any incentive for entry or exit.

Figure 9-6:

Moving from positive to zero profit.

Similarly, if initial economic losses — negative economic profit — exist, firms leave the market, moving the perfectly competitive market to its long-run equilibrium. This situation is illustrated in Figure 9-7. The loss of firms decreases supply from SB to SLR, resulting in upward pressure on price, from PB to PLR. With the increase in price, your firm’s profit-maximizing quantity increases from qB to qLR, and zero economic profit is reached because the price PLR now equals average total cost.