Our analysis of zero profit conditions showed that firms might stay in business for a time even though they are unprofitable. This situation is possible particularly for firms with high fixed capital costs. With this analysis we can understand why in business downturns many of America's largest companies, such as General Motors, stayed in business even though they were losing billions of dollars.
There is then a critical zero profit point below which long run price cannot remain if firms are to stay in business. In other words, long run price must cover out of pocket costs such as labor, materials, equipment, taxes, and other expense, along with opportunity costs such as competitive return on the owner's invested capital.
The conclusion is that in the long run the price in an industry will tend toward the critical point where identical firms just cover their full competitive costs. Below this critical long run price, firms would leave the industry until price returns to long run average cost. Above this long run price new firms would enter the industry, thereby forcing market price back down to the long run equilibrium price where all competitive costs are just covered.
There is then a critical zero profit point below which long run price cannot remain if firms are to stay in business. In other words, long run price must cover out of pocket costs such as labor, materials, equipment, taxes, and other expense, along with opportunity costs such as competitive return on the owner's invested capital.
The conclusion is that in the long run the price in an industry will tend toward the critical point where identical firms just cover their full competitive costs. Below this critical long run price, firms would leave the industry until price returns to long run average cost. Above this long run price new firms would enter the industry, thereby forcing market price back down to the long run equilibrium price where all competitive costs are just covered.
