In a perfectly competitive market, the long-run outcome would depend on various factors, but two common scenarios can be considered:
a. Companies enter the industry, the supply increases, and the price decreases:
If there are no barriers to entry or exit, new firms would be attracted to the market due to the absence of economic profits in the short run. These new entrants increase the supply of goods or services in the market. As the supply curve shifts to the right, the equilibrium price decreases due to the increased competition among firms. This process continues until the price reaches the minimum average total cost of production, resulting in zero economic profits for all firms in the long run.
b. Companies leave the industry, the supply decreases:
If firms in the industry are facing losses in the short run, some may choose to exit the market. As firms exit, the overall supply of goods or services decreases. This reduction in supply leads to an increase in the market price. The process continues until the price reaches a level where the remaining firms in the market are able to cover their costs and earn normal profits.
It's important to note that the long-run outcome in a perfectly competitive market is characterized by firms earning zero economic profits. This occurs because in the long run, firms have the flexibility to adjust their production levels, and new firms can enter or existing firms can exit the industry, resulting in a state where prices align with average costs. Additionally, in the long run, technological advancements, changes in consumer preferences, and other factors can also impact the equilibrium conditions of the market.