P = ATC Price equals Average Total Cost Total revenue covers all costs, resulting in zero economic profit. This market price is then taken as given by the individual firm.
How Market Entry and Exit Establish Long Run Competitive Balance
Condition Description Implication for the Firm P = MR Price equals Marginal Revenue The firm is a price taker; it sells each unit at the market price. The Critical Role of Price and Marginal Cost In the long run equilibrium, the firm operates on the perfectly elastic portion of its long-run average cost curve, where minimum efficient scale is achieved.
At this point, the firm is covering all explicit costs, such as wages and materials, as well as implicit costs, like the return an owner could have earned by investing their capital elsewhere. If firms in a perfectly competitive market are earning positive economic profits in the short run, this acts as a powerful signal and an open invitation for new competitors.
How Market Entry and Exit Establish Long Run Competitive Balance
P = min LRAC Price equals minimum Long-Run Average Cost The firm is producing at the lowest possible average cost, achieving productive efficiency. This environment creates a unique pressure cooker for firms, forcing them to adapt until they achieve a state of balance where economic profits are zero.
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