Final answer:
In the short run, if a firm's price equals its average total cost, the firm is breaking even with zero economic profit. This position represents a stable situation for the firm in the perfectly competitive market, indicating that the firm is covering all of its costs, including opportunity costs.
Step-by-step explanation:
When a firm's price equals its average total cost (ATC), it means the firm is earning zero economic profit in the short run. This situation is also referred to as the firm breaking even. It is important to distinguish zero economic profit from accounting profit, as the former includes opportunity costs in its calculation.
Economic profit is the difference between total revenue and total economic costs, which include both explicit and implicit costs, such as opportunity costs.
In the context of a perfectly competitive market, when a firm's price is greater than its ATC, the firm earns an economic profit. Conversely, if price is less than ATC, the firm incurs a loss.
Firms will continue operating in the short run as long as the price is above average variable costs (AVC), even if they are making economic losses, because they are able to cover their variable costs and contribute to fixed costs.