Question

1. Why can't perfect competitors make an above-normal profit in the long-run 2. What is the significance that profit maximization for the perfect competitor occurs where P = MC - MR - ATC? 3. Why don't we have a perfectly competitive system? (go over each of the requirements for perfect competition and explain why that does not occur). 4. Which of the requirements do you think is the most important reason we don't have a system of perfect competition? Explain.

Answer 1

Ans 1.

All Factors of production are variable in the long run.

Also 2 assumption in regards to perfect competition are

1. free entry and exit

2. perfect resource mobility( is the ease of movement of resources between locations or it can be between productive activities).

So, in the long run scenario, firms which are making abnormal profit will attract new firms to join, firms which can enter freely because of perfect competition (the 2 assumptions stated above). This would lead to increase supply as more firms will be producing and which will reduce the price of the product.

New firms will stop entering the market once existing firms make zero economic profit.

And in other hand , in the long run, firms which are facing loses in the market will exit the market sooner due to not being able to compete with other firms, which will result in decrease in market's supply ( result in leftward shift in supply curve), and less supply will increase the industry price.

Firms will exit until the remaining ones make normal profit again. and this cycle of entering and leaving of firms will go on.

So in the long run, all firms in perfect competition earn normal profit( can be termed as break-even or zero economic profit).