Zero-profit long-run equilibrium

In a competitive industry populated by identical firms with free entry and exit, the long-run equilibrium condition is that price equals marginal cost equals the minimum long run average cost for each identical firm: We have reached a surprising conclusion about the long-run profitability of competitive capitalism. The forces of competition tend to push firms and industries toward a zero-profit long-run state. In the long run, competitive firms will earn the normal return on their investment, but no more. Profitable industries tend to attract entry of new firms, thereby driving down prices and reducing profits toward zero. By contrast, firms in unprofitable industries leave to seek better profit opportunities; prices and profits then tend to rise. equilibrium in a focally competitive industry is then fore om with no economic profits.

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