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12.5 Long-Run Equilibrium

If perfectly competitive producers are able to make economic profits, they will increase the resources that they devote to that lucrative business. As production proves profitable, there will be a supply response--the market supply curve will shift to the right over time as more firms enter the industry and existing firms expand. The impact of increasing supply, other things equal, is to reduce the equilibrium price.

As entry into the profitable industry pushes down the market price, producers will move from making a profit (P > ATC) to zero economic profits (P = ATC). In long‑run equilibrium, perfectly competitive firms make zero economic profits.

Exhibit 1: Profits Disappear with Entry

Zero economic profits is an equilibrium or stable situation because any positive economic (above‑normal) profits signal resources into the industry, beating down prices and thus revenues to the firm; economic losses signal resources to leave the activity, leading to supply reductions that lead to increased prices and higher firm revenues to the remaining firms. Only at zero economic profits is there no tendency for firms to either enter or leave the business.

Exhibit 2: Losses Disappear with Exit

The long‑run competitive equilibrium for a perfectly competitive firm can be graphically illustrated. At the equilibrium point (where MC = MR), short-run and long-run average total costs are also equal. The average total cost curves touch the marginal cost and marginal revenue (demand) curves at the equilibrium output point. Because the marginal revenue curve is also the average revenue curve, average revenues and average total costs are equal at the equilibrium point.

Exhibit 3: The Long-Run Competitive Equilibrium

The long-run equilibrium output in perfect competition occurs at the lowest point on the average total cost curve, so the equilibrium condition in the long run in perfect competition is for firms to produce at that output that minimizes per-unit total costs.