Economics Online Tutor

Perfect Competition: Long
Run Equilibrium
Long run equilibrium in perfect competition is reached when no economic
profits exist.  Economic profits equal zero.

To understand this, remember that equilibrium is a situation in which no
incentives for change exist.  Also remember that normal profits represent
an opportunity cost.

Normal profits are required in order to keep a firm from choosing a
different option than the current one.


If economic profits (profits above normal profits) exist, then the market
becomes more profitable than other markets or opportunities.  With ease
of entry as a condition of perfect competition, this will be an incentive for
new firms to enter the industry.

If economic losses (profits less than normal profits) exist, then the market
becomes less profitable than other markets or opportunities.  With ease of
exit, this becomes an incentive for existing firms to exit the industry.

Only when economic profits are equal to zero will no incentives for change
exist, allowing equilibrium to occur.


With ease of entry and exit a characteristic of perfect competition,
economic profits will cause new firms to enter the market.  The market
supply curve will shift to the right, indicating an increase in supply.  This
will create a new market price that is lower than the previous market price.  
The lower market price will eliminate the economic profits, and equilibrium
can be reached.

Economic losses will cause existing firms to exit the market.  The market
supply curve will shift to the left, indicating a decrease in supply.  This will
create a new market price that is higher than the previous market price.  
The higher market price will eliminate economic losses, and equilibrium
can be reached.
This page, along with additional commentary, was posted on the "Economics
Online Tutor" Facebook page's timeline on July 27, 2012.
Do you find the information on this page helpful?

The left column of the
home page lists all of the economics topics
covered in this website. Now, you can receive a FREE ebook version
of the information in this site under the title

Basic Economics for Students and Non-Students Alike
By Jerry Wyant

Or if you prefer, you may purchase a paperback version from
Amazon, Barnes & Noble, Sony, Apple, and other distributors.

This makes a great handbook and reference. Students: please help to
make sure your classmates and teachers are aware of this resource!

Click here to order a FREE ebook from smashwords.com

Click here to purchase a paperback version from amazon.com