Question

Mrunal opened the first flower shop in her town. For a while, she was the only provider of flowers, until people noticed how profitable her business had been. Now several new flower shops have opened. What might happen to Mrunal's business in the long run?

Answer 1

When it is easy for competitors to enter the market competition will increase.

In the long run, as more competitors enter the market, it won’t be possible for existing companies to earn economic profit.

This means that the price charged must be equal to average total cost.

Explanation

In the long run firms can enter and exit from the market. If some firms get economic profits, it will attract other firms to enter into the market. When firms enter into the industry, competition will start. Also volume of supply increases which will reduce the price in the market. Therefore firms won’t enjoy the economic profits. In other words, all the firms produce at such a level of output where the price just equals to the average total cost indicating normal profits. Since there is a normal profit, the entry and exit of firms can be avoidable.