In the long run, what level of economic profit do firms in a perfectly competitive market earn?

• A. Zero
• B. Positive
• C. Negative
• D. It depends on demand

Answer: (A)

In a perfectly competitive market, long-run equilibrium leads to zero economic profit because entry and exit of firms adjust until price just covers all costs, including opportunity costs. Firms are price takers with identical products and no barriers to entry, so when profits are positive, new firms enter, increasing supply and lowering the price. When losses occur, some firms exit, reducing supply and raising the price. This process continues until price equals average total cost, so total revenue equals total costs and economic profit is zero. At this point, firms earn just normal profit, not extra above it.