Explain why, in a competitive market, firms only generate normal profits in the long run, whereas...
Explain why, in a competitive market, firms only generate normal profits in the long run, whereas they can generate super normal profits in the short run?
Homework Answers
In the short run, the firms can earn supernormal profits as there may be fewer firms in the market which will increase the price and the firm ay earn supernormal profits
In the long run, the market is characterized by free entry and exit so if the firms in the short run are earning supernormal profits, more firms will be attracted to the market due to which the market supply will increase which will decrease the price until is equal to the minimum ATC where total revenue = total cost so that the firms will have no longer an incentive to enter the market and the firms will break even.
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Explain why, in a competitive market, firms only
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