However, in the short run it is possible for a perfectly competitive firm to make a positive economic profit, an instructors will commonly ask where the profit maximizing point is. Another common question is to ask about changes in market, and how this will affect a perfectly competitive firm's profit.
I am going to begin with an example of a perfectly competitive firm in long run equilibrium. You will note that two conditions need to hold in order for economic profit to be zero, and to be in the long run equilibrium:
- Marginal revenue (price from the market) is equal to marginal cost, which is equal to average total cost.
- Average total cost is at its minimum point.
It is also critical to remember that all firms will produce where MR=MC (except when being asked about shut down points).
In the above example, firms will exit the market (shifting the supply curve left), until price again reaches its equilibrium value at the point where MC=MR=ATC shown in the first graph.
But what would happen if costs for the firm were to fall? For example, what if a firm purchased new bookkeeping software that enhanced productivity? This would cause a decrease in costs, so we would see both MC and ATC shift down and to the left. When this occurs, firms will experience a gain in economic profit in the short run, as shown below: