Perfect Competition (Firm)
Price-taking firms, zero long-run profit, and why entry and exit discipline the market.
The Perfect Competition (Firm) model, in writing
Definition
Many identical firms each too small to affect price: every firm takes the market price as given and produces where price equals marginal cost, with free entry driving profit to zero in the long run.
P = MR = MC ; long run: P = min ATC, profit = 0
The intuition
If firms in the industry earn profit, entrants flood in, supply shifts right, and price falls until the profit is gone; losses trigger exit and the reverse. The long run therefore pins price to the bottom of average cost: consumers get the good at the cheapest sustainable price, and 'zero economic profit' still includes a normal return.
Exam tip
Zero ECONOMIC profit is not zero accounting profit; it means covering all opportunity costs. Shutdown in the short run happens when P falls below AVC, not ATC.
Related models in Micro Foundations