Final answer:
In the long run, a competitive market reaches an equilibrium where profits equal zero due to perfect competition, where positive profits attract new entries and losses initiate exits until only normal profits are made, and no firms want to enter or exit the market.
Step-by-step explanation:
In a competitive market, in the long run, profits will equal zero primarily due to perfect competition. This economic outcome occurs because positive economic profits in the market typically attract new competitors, which increase the supply and drive down prices. Conversely, economic losses lead to businesses exiting the market, reducing supply and increasing prices until they only cover the costs of production, including a normal profit.
Under perfect competition, firms make output decisions by calculating profits by comparing total revenue and total cost. When firms reach long-run equilibrium, they produce at a point where average total costs are minimized and economic profits are zero, meaning no new firms wish to enter and no existing firms desire to exit the market.
Although monopolistic competitors also tend toward zero economic profits in the long run due to entry and exit, the outcomes differ in regards to efficiency and market variety. Entry and exit in monopolistic competition lead to a range of products being offered rather than a single standardized product, and while firms may break even, they do not achieve productive efficiency as in a perfectly competitive market.