Microeconomics: Theory and Applications with Calculus, 4e

9.1 Zero Profit for Competitive Firms in the Long Run

Competitive firms earn zero profit in the long run whether or not entry is completely free. Consequently, competitive firms must maximize profit.

Zero Long-Run Profit with Free Entry

The long-run supply curve is horizontal if firms are free to enter the market, firms have identical cost, and input prices are constant. All firms in the market operate at minimum long-run average cost. That is, they are indifferent about whether or not to shut down because they are earning zero profit.

One implication of the shutdown rule is that firms are willing to operate in the long run even if they are making zero profit. This conclusion may seem strange unless you remember that we are talking about economic ...