Explain why a firm in perfect competition can not experience abnormal profit in the long run.

Perfect competition is a market structure in which an infinite number of firms produces identical products for an infinite number of consumers. It is an ideal and theoretical model. Abnormal (supernormal/economic) profit is not possible in the lung run, under this market structure, because of the infinite number of price-taker firms and the absence of barriers to entry.

When a price competitive firm makes abnormal profit (TR>TC), the infinite number of firms will be attracted to enter the market. The absence of barriers to entry makes this possible. The number of firms is a non price determinant of the market supply, which will therefore shift left after the increase, lowering the market price. Since firms are price takers, they must accept the market price and lower their MR curve (P, AR and D). In addition, in theory of the firm, the profit maximisation level of output is at the point where MC = MR. After the fall in price, this point will be lower and the abnormal profit will be reduced. This process occurs until Price equals the minimum average total cost. At this point there is normal profit, which is defined as the amount of money that a business must make in order to keep resources on their current usage. Similarly, losses are not possible in the long run, as firms will leave the market and the market price will shift up, covering the short run loss.

Overall, firms in perfect competition can only make normal profit in the long run. This is due to the infinite price-taker firms and the absence of barriers to entry and exit in the market.

Answered by Bianca V. Economics tutor

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