behind a process that, in the long run, pushes the price down to minimum average total costs so that all firms

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8.3 • Entry and Exit Decisions in the Long Run 205

are earning a zero profit.

To understand how short-run profits for a perfectly competitive firm will evaporate in the long run, imagine

the following situation. The market is in long-run equilibrium, where all firms earn zero economic profits

producing the output level where P = MR = MC and P = AC. No firm has the incentive to enter or leave the

market. Let’s say that the product’s demand increases, and with that, the market price goes up. The existing

firms in the industry are now facing a higher price than before, so they will increase production to the new

output level where P = MR = MC.

This will temporarily make the market price rise above the minimum point on the average cost curve, and
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