Think of the following as a market adjustment process .......
If economic profit > 0 then firms enter the industry, supply increases, market price falls, so economic profit disappears ...
If economic profit < 0 then firms exit the industry, supply decreases, market price rises, so economic profit increases ... Therefore, only when economic profit = 0 will firms no longer enter or exit the industry and this is ultimately referred to as long-run equilibrium.
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Remember, there are two equilibrium conditions in the long-run.
1. To maximize profit, set MR = MC!
2. P = AC (i.e., TR = TC) so that economic profit = 0
One of the most significant results of the perfectly competitive model is that in the long run, price ends up equal to AC at it's minimum point. This is a very, very, very important result that occurs only in perfect competition!
What does P = minimum AC imply for the firm? for the industry?
