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ER / Concepts

Short-run and Long-run Equilibrium

Created October 10, 2026 · Updated October 11, 2026

See the three conditions table in Perfect Competition.

In SR, three cases

$p > ATC$ : the firm is making supernormal profit.
$p = ATC$ : the firm revenue is covering TC(FC + VC), just breaking-even.
$p<ATC$ $p < A T C$ : economic loss.
- $AVC \le P < ATC$ : keep producing (loss < FC)
- $p<AVC$ : shut down. Shutdown Rule

In LR, zero economic profit

If firms make economic losses -> some firms exit -> price rises.
If firms earn economic profit -> new firms enter -> price drops.
So only stops when firms earn zero, at $p = MC = min ATC$ .
Linked chain: $P = MC$ (always) + ( $P > ATC$ → entry → market supply shifts right → $P$ falls) → $P = ATC$ ⇒ $MC = ATC$ ⇒ $\min ATC$
Zero economic profit = normal profit, not zero accounting profit → Economic Profit

Why can entry and exit (→ zero profit) happen only in the LR?

In the SR, there is no time to build new capacity, so the number of firms is fixed. In the LR, all factors are variable, so firms can enter or exit.

Two questions, two benchmarks (SR)

Profit or loss? → $P$ vs $ATC$ (FC is still paid, so it counts)
Produce or shut down? → $P$ vs $AVC$ (FC is paid either way, so it drops out) e.g. $P = 8$ , $AVC = 6$ , $ATC = 16$ : economic loss, but keep producing.