A bakery operates in a perfectly competitive market where its average total cost equals the market price of its pastries. Which statement best explains the bakery's situation?

In a perfectly competitive market, firms like the bakery are price takers, meaning they accept the market price for their products. When the bakery's average total cost equals the market price of its pastries, it is earning what is called a normal profit. This means that the bakery is covering all its costs, including both fixed and variable costs, but it is not making any extra profit beyond that. For example, if the bakery sells a pastry for $2 and its average total cost to make that pastry is also $2, it is breaking even. In the long run, this situation encourages more bakeries to enter the market, as there is no incentive to leave when firms are covering their costs.