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In economic competition theory, the zero-profit condition is the condition that occurs when an industry or type of business has an extremely low (near-zero) cost of entry to or exit from the industry. In this situation, some firms not already in the industry tend to join the industry if they calculate that they will make a positive economic profit (profit in excess of the cost of acquiring investible funds). More and more firms will enter until the economic profit per firm has been driven down to zero by competition. Conversely, if firms are making negative economic profit, enough firms will exit the industry until economic profit per firm has risen to zero.

This description represents a situation of almost perfect competition. The situation with zero economic profit is referred to as the industry’s long run.

According to the theory of contestable markets, if few enough firms are in the industry so that one would expect positive economic profits, the prospect of other firms entering the market may cause firms in the industry to set prices as if those other firms were already in the market; thus actual entry by those firms is not necessary for the market to appear perfectly competitive.

ExamplesEdit

Historically, this condition was present in most gold rushes, as diggings required nothing but manpower and few skills or machinery. It has been noted in such circumstances, that the ancillary services supplying the activity become very successful. For example, few gold prospectors became wealthy, but many formed successful businesses selling shovels.

For another example, despite the real estate boom of the mid-2000s, the incomes of real estate agents did not rise significantly. It is easy to become an agent, so when profits start to rise, more people do become agents, and the existing agents start to sell fewer houses.[1]

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