Explain why, in the long run, a firm will always make normal profits.

The condition for this scenario is that perfect competition must hold, whereby there is free entry to and exit from the market, and perfect information is available to all firms.In the short run, if firms successfully price above their average costs, abnormal profits can be earned. This acts as an incentive for new firms to enter into the market in order to access these potentially large profits. This increase in supply will cause a price fall, until price is equal to average cost and normal profits are earned.Conversely, if the selling price is below average cost, firms will make a loss in the short run. This prompts firms to exit the market, shifting supply inwards and raising prices to the point where economic profit is zero.Thus, in the long run, provided the conditions of perfect competition hold, a firm will always earn normal profit.