Final answer:
In a perfectly competitive market, firms make economic losses when the market price falls below their average cost curve. Some firms may continue producing in the short run, while others may shut down immediately. Market forces eventually lead to a zero-profit equilibrium.
Step-by-step explanation:
In a perfectly competitive market, a firm makes economic losses when the market price falls below its average cost curve. When this happens, the firm is unable to cover both its variable costs and fixed costs, resulting in losses. Some firms may continue producing in the short run as long as they can cover their average variable costs, while others may choose to shut down immediately and only incur their fixed costs.
The exit of firms from the market causes the market supply curve to shift to the left, leading to a rise in the market price. This process continues until the market price rises to the zero-profit level, where firms are no longer making losses and are at a break-even point.
Overall, while a perfectly competitive firm may experience losses in the short run, in the long run, the entry and exit of firms will drive the market to reach a zero-profit equilibrium.