The fact that firms in this industry are earning positive profit will encourage entry into the market. This
entry by new firms will drive the market price down until firms earn zero economic profit. At this point,
firms not in the industry will have no incentive to enter, and firms in the industry will have no incentive
to exit, so the industry will be in long-run equilibrium.
Because you know that perfectly competitive firms earn
economic profit in the long run, you know the long-run equilibrium price must be
per pound. From the graph, you can see that this means there will be
firms operating in the copper industry in long-run equilibrium.
In the long run, firms will enter the industry if they can earn a positive profit, and firms will exit the
industry if they are running at a loss. In long-run equilibrium, firms have no incentive to either enter or
exit the industry, which means that firms in the industry must be earning zero economic profit.
Total profit—the difference between total revenue and total cost—can be calculated as the difference
between the price and average total cost times the quantity of output:
. Because average profit per
unit is measured by
, and because perfectly competitive firms produce at the point at which price
equals marginal cost (
), firms earn zero economic profit when
. As seen in the preceding cost-curve
graph, this occurs at a price of $44 per pound.
From the previous graph, you can see that the short-run equilibrium price is $44 per pound if there are
30 firms in the copper industry, indicating that $44 per pound is the long-run price. Therefore, if there
are 30 firms in the industry, firms will have no incentive to enter or exit the market.
7. Short-run and long-run effects of a shift in demand
Suppose that the perfectly competitive tuna industry is in long-run equilibrium at a price of $3 per can
of tuna and a quantity of 600 million cans per year. Suppose the Surgeon General issues a report
saying that eating tuna is good for your health.