A competitive industry in long-run equilibrium

Long-run equilibrium in perfect competition is the point where firms have no reason to enter or leave. That happens when economic profit is zero: price equals the lowest point on average total cost.

Zero economic profit does not mean the owners earn nothing. Economic cost includes the opportunity cost of the owners' money, time and other resources, so zero economic profit means they earn exactly what those resources could earn in their next best use. That is a normal return, so investors are earning a return equal to their opportunity cost.

Each choice

• A. Firms leave only when they are losing money. In long-run equilibrium economic profit is zero, so there is no reason to exit.
• B. Competitive firms in the long run produce at the lowest point of ATC, because entry and exit push price to that point. Producing above minimum ATC is the monopolistic competition result.
• C (correct). Zero economic profit means every resource, including the owners' capital, earns just what it could earn elsewhere.
• D. If some resource earned less than its opportunity cost, its owner would move it elsewhere, and the industry would not be in equilibrium.
• E. In long-run equilibrium nothing is pushing price up or down. A price increase would need a change in demand or costs, which this choice does not describe.