Long-run Supply in a Perfectly Competitive Market

In the long-run, firms can vary all of their input factors. The ability to vary the amount of input factors in the long-run allows for the

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possibility that new firms will enter the market and that some existing firms will exit the market. Recall that in a perfectly competitive market, there are no barriers to the entry and exit of firms. New firms will be tempted to enter the market if some of the existing firms in the market are earning positive economic profits. Alternatively, existing firms may choose to leave the market if they are earning losses. For these reasons, the number of firms in a perfectly competitive market is unlikely to remain unchanged in the long-run.

Zero economic profits. The entry and exit of firms, which is possible in the long-run, will eventually cause each firms' economic profits to fall to zero. Hence, in the long-run each firm earns normal profits. If some firms are earning positive economic profits in the short-run, in the long-run new firms will enter the market and the increased competition will reduce all firms' economic profits to zero. Firms that are earning negative economic profits (losses) in the short-run will have either make some changes in their fixed factors of production in the long-run or choose to leave the market in the long-run. A perfectly competitive market achieves long-run equilibrium when all firms are earning zero economic profits and when the number of firms in the market is not changing.

In the long-run, a perfectly competitive firm can adjust the amount it uses of all factor inputs, including those that are fixed in the short-run. For example, in the long-run, the firm can adjust the size of its factory. In making these adjustments, the firm will seek to minimize its long-run average total cost.

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