Explain why is there only normal profit in the long period
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Explain why in long-run equilibrium in aperfectly competitive industry firms will earn zero economic profit. ...Explain why under perfection competition output prices will change by less than the change in production cost in the short run, but by the full amount of the change in production cost in the long run.
mehak926:
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In the long run, all factors of production are variable. Also, two of the assumptions of firms in perfect competition are free entry and exit, as well as perfect resource mobility.
In the long run, firms making abnormal profit will attract new firms, which will enter freely due to the two assumptions already stated. This would increase the industry supply (and shift the supply curve to the right) which will decrease the industry price.
New firms will stop entering the market once existing firms make zero economic profit.
On the other side, in the long run, firms making losses (producing under the break-even price) will exit the market due to not being able to compete with other firms, which will decrease industry supply (and shift the supply curve to the left), which will increase the industry price.
Firms will exit until the remaining ones make normal profit again.
So in the long run, all firms in perfect competition earn normal profit (or zero economic profit)
In the long run, all factors of production are variable. Also, two of the assumptions of firms in perfect competition are free entry and exit, as well as perfect resource mobility.
In the long run, firms making abnormal profit will attract new firms, which will enter freely due to the two assumptions already stated. This would increase the industry supply (and shift the supply curve to the right) which will decrease the industry price.
New firms will stop entering the market once existing firms make zero economic profit.
On the other side, in the long run, firms making losses (producing under the break-even price) will exit the market due to not being able to compete with other firms, which will decrease industry supply (and shift the supply curve to the left), which will increase the industry price.
Firms will exit until the remaining ones make normal profit again.
So in the long run, all firms in perfect competition earn normal profit (or zero economic profit)
thank you
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