When firms in perfect competition reach a long-run competitive equilibrium, the market forces of supply and demand balance out. This leads to zero economic profit for the firms remaining in the market.

Mechanism of Market Adjustment:

  • Entry of new firms when existing firms earn above-normal profits leads to increased market supply and reduced prices.
  • The exit of existing firms facing losses leads to decreased market supply and increased prices.

Achievement of Equilibrium: The continuous process of entry and exit eventually stabilizes the market price at a point where the remaining firms in the market make no economic profit, ensuring no incentive for further firm entries or exits.

Consider an example from the digital streaming industry. As new platforms emerge, attracted by initial high profits, the increased content availability leads to price competition. The market price is determined by the total supply produced by all existing platforms in the market. As more firms enter the market, the market price eventually falls to equal the minimum point on the average total cost curve (ATC) for the existing firms. Without the potential for making economic profits, new firms are no longer motivated to enter the market, stabilizing the market in a long-run competitive equilibrium.

The concept of long-run competitive equilibrium underscores the self-regulating nature of markets under perfect competition. It illustrates how the individual efforts of the firms to maximize their profit leads the market to an efficient allocation of resources that benefit both producers and consumers. Remember, the pursuit of self-interest in a competitive market leads to the most economically efficient outcomes.

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