The short run takes the number of firms as fixed (The Shutdown Rule). In the long run firms can enter and exit, and every firm can choose its scale (Economies and Diseconomies of Scale). That changes where price ends up.
Key idea
If firms earn economic profits, new firms enter; market supply shifts right and the price falls. If they make losses, firms exit; supply shifts left and the price rises. Entry and exit stop when the price equals minimum ATC: in long-run equilibrium, each firm earns zero economic profit and produces at the bottom of its ATC curve.
Why it works
Economic profit means the industry pays better than the best alternative use of the owners' time and money, so outsiders want in. Each new firm adds to market supply, pushing the price down, until the extra return is gone. Losses work in reverse. Zero economic profit is not zero reward: every owner still earns a normal return, as much as they could get anywhere else.
Worked example: The long-run price and the number of firms
Each firm's ATC is lowest at 10 units, where it is \$20. Market demand is $Q_d = 1{,}000 - 25P$. In long-run equilibrium, what is the price, and how many firms are there?
- Long run: $P = \min ATC = \$20$.
- Market quantity: $Q_d = 1{,}000 - 25(20) = 500$.
- Each firm makes 10 units, so there are $500 \div 10 = 50$ firms.
Answer: \$20 and 50 firms.
Worked example: After a demand increase
From that equilibrium, demand increases. What happens in the short run and the long run?
- Short run: the price rises above \$20; each firm moves up its MC curve and earns a profit.
- Long run: profits attract entry; market supply shifts right until the price is back at \$20.
- More firms, each making 10 units again; the market quantity is larger.
Answer: The price rises, then returns to \$20 with more firms.
Common mistake
Two mix-ups. Treating zero economic profit as no reward for owners; it includes a normal return on their resources. And shifting the firm's cost curves when firms enter; entry adds firms, which shifts the market supply curve. Each firm's costs stay the same. Check: in the long-run story, the only curves that move are on the market graph.