Long-Run Equilibrium
What is Long-Run Equilibrium?
Long-run equilibrium in perfect competition occurs when firms earn zero economic profit, with price equal to minimum average total cost.
In the long run, firms enter or exit the market until economic profits are eliminated, driving price down to the lowest point on the average total cost curve. At this point, firms produce at productive efficiency and no incentive exists for new firms to enter or existing firms to exit.
Long-Run Equilibrium: a worked example
Suppose a competitive market for cold-pressed juice sits at $6 a bottle while a typical firm's minimum average total cost is $4, reached at 500 bottles. That firm earns (6 - 4) x 500 = $1,000 in economic profit. The profit attracts new sellers, market supply shifts right, and price slides. Entry stops once price reaches $4, because now profit is (4 - 4) x 500 = $0. The firm still makes 500 bottles, the quantity where marginal cost has risen to $4, so P = MC = min ATC. Nobody wants in, nobody wants out, and the market sits still at 500 bottles per firm.
The mistake students make with long-run equilibrium
Students read zero economic profit as the firm barely surviving, or even losing money, and conclude the owner should quit. Economic profit already subtracts opportunity cost, including what the owner could earn running something else, so zero economic profit means this business pays exactly as well as the next best option. Accounting profit at that point is positive. The error is tempting because in everyday speech profit means revenue minus the money you actually paid out, which is a different subtraction.
Long-Run Equilibrium questions
Why do perfectly competitive firms end up with zero profit in the long run?
Perfectly competitive firms end up with zero economic profit because entry into the market is free. Any positive profit signals outsiders to build identical firms, market supply grows, and price falls. Any loss pushes firms out, supply shrinks, and price rises. The only price that stops both movements is the one equal to minimum average total cost, so profit gets squeezed to zero from whichever side it started.
Is a firm in long-run equilibrium productively and allocatively efficient?
A perfectly competitive firm in long-run equilibrium is both productively and allocatively efficient. Productive efficiency holds because output sits at the bottom of the average total cost curve, the cheapest possible cost per unit. Allocative efficiency holds because price equals marginal cost, meaning the value buyers place on the last unit exactly matches what society gave up to make it.
What happens if firms are taking losses in the short run?
Firms taking economic losses in perfect competition exit the industry over the long run, provided price stays below average total cost. Each exit removes supply, shifting the market supply curve left and pushing price up. Exit continues until the survivors break even at minimum average total cost. Any firm whose price also falls below average variable cost shuts down immediately rather than waiting.
Formula / Example
This is the live Perfect Competition sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
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