Why Will Perfectly Competitive Firms Make Zero Profits in the Long

Question

Examlex · Accepted Answer

The Answer is (a) In the short run, the number of firms is fixed and the firm can either make a profit or a loss. In the long run however, firms will enter markets where other firms are earning short run profits. They will keep on entering until prices fall to the point where all economic profits are competed away and firms earn nothing but normal profits. In the long run, firms also will exit from markets where firms are making short run losses. They will keep on exiting until prices rise to a level where all economic losses are eliminated and the remaining firms earn normal profits.
(b) Normal profit means that the resources provided by the owners of the firm are earning their opportunity cost (the amount the owners of the business would receive in the next-best alternative use of their resources). Economic profit occurs when revenue exceeds all costs, including the opportunity cost of resources provided by the owners (normal profits). When firms earn economic profits, it means that the owners are earning more than their opportunity costs.

Why Will Perfectly Competitive Firms Make Zero Profits in the Long

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