Thus a firm might operate at a loss in short run because it expects to earn a profit in future as the price of its product increases or costs of production fall. A firm will find it profitable to shut down when the price of its product is less than the minimum average variable cost. In long run, the firmearns zero economic profits. Economic profit takes account of opportunity costs. One such opportunity cost is the return that the owners of the firm could make if their capital were invested elsewhere. A firm earning zero economic profits need not go out of business, because zero profit means the firm is earning a reasonable return on its investment.
A positive profit means an unsually high return on investment. This high return causes investors to direct resources away from other industries into this one there will be entry into the market. Eventually the increased production assosciated with new entry causes the market supply curve to shift to the right so that the market output increases and the the market price falls. Therefore there will be zero economic profits. When a firm earns zero profit, it has no incentive to enter. A long run competitive eqilibrium occurs when three conditions hold.
First, all firms in the industry are maximizing profit. Second , no firm has an incentive either to enter or exit the industry, because all firms in the industry are earning zero economic profit. Third the price of the product is such that the quantity supplied by the industry is equal to quantity demanded by the consumers. The concept of long run equilibrium tells us the direction that firms behaviour is likely to take. The idea of an eventual zero profit , long run equilibrium should not discourage a manager whose reward depends on short run profit that the firm earns.