Why can firms in a perfectly competitive market only achieve normal profits in the long run?

Normal profit is the minimum level of profit required to maintain a firm's factors of production in their present use. It is measured by the opportunity cost of using them.
Supernormal profit is any additional profit on top of the normal profit. A primary function of supernormal profit is that it acts as an incentive to attract new firms to a market. This causes a greater supply within the market, causing price to fall. New firms will continue to enter the market since there is perfect knowledge and no barriers to entry. Therefore the supply will continue to shift right until LRAC is equal to price and firms are making only normal profit. At this point, there is no longer any incentive for new firms to enter the market and the long run equilibrium within a perfectly competitive market has been achieved.

Answered by William E. Economics tutor

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