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.

WE
Answered by William E. Economics tutor

2981 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain the importance of low interest rates in bringing about a recovery from recession in an economy like the UK. (10)


What characteristics might a perfectly competitive market have? Choose 3 (6 marks)


Macroeconomic policy can both be a problem and a solution in economic fluctuations. Explain.


Describe the long run aggregate supply curve.


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2026 by IXL Learning