Economics – Different market structures | e-Consult

In the long run, economic profit (profit above a normal rate of return) in a perfectly competitive market will attract new firms to enter the market. This is because the free entry condition allows firms to enter if they perceive an opportunity for profit.

The entry of new firms will increase the overall market supply, shifting the market supply curve to the right. This will lead to a decrease in the market price. This price decrease will continue until economic profit is driven down to zero. At this point, firms are earning only a normal rate of return on their investment.

The long-run equilibrium in perfect competition is characterized by:

• P = MC = ATC
• Zero economic profit
• Free entry and exit

This outcome is considered allocatively efficient, as resources are allocated to their most valuable uses.