Final answer:
In a perfectly competitive market, entry and exit of firms lead to a situation where the price equals the minimum average total costs, and firms earn zero economic profit in the long-run equilibrium.
Step-by-step explanation:
In the long run in a perfectly competitive market, entry and exit of firms drive economic profit to zero. This happens because the entry of new firms increases the supply in the market when there are positive economic profits, leading to a decrease in price until profits are no longer above normal.
Conversely, when firms are experiencing economic losses, some will exit the market, decreasing supply and increasing price until firms are not incurring losses anymore. In the long run, this process of entry and exit continues until firms are earning zero economic profit, which means the price also equals the minimum average total costs.
Importantly, earning zero economic profit does not imply that firms are not making any money; it simply means their accounting profits are equal to what they could earn elsewhere, in their next best alternative use.
When the market achieves this situation, no new firms want to enter and no existing firms want to leave, signifying a state of long-run equilibrium. This is when the market price has adjusted such that all firms are just covering their opportunity costs, but with no surplus profit above that level.