Question

Explain why, when all adjustment have taken place, the perfectly competitive firm will operate at the minimum of its short-run and long-run average total cost curves and earn zero economic profit.

Answer 1

The adjustments take place when new firms enter the market, under the scenario of existing firms making positive economic profit and existing firms exiting the market when there is a negative economic profit. When these adjustments, the price in the perfect market shifts. When there is a positive economic profit, new firms enter and supply increases. It pushes the price down and it becomes tangent to the lowest point of the ATC. At this point, MC curve passes through the lowest point of ATC curve.
When firms exit, then supply decreases and price increases and move upward. It again makes demand curve to be tangent at the lowest point of ATC and MC curve passes through the point of tangent. At this level also, zero economic profit is achieved.
In the log run, lowest point of all the short run ATC curve makes long run ATC curve and its minimum point, the demand curve becomes tangent to achieve long run equilibrium of zero economic profit.