Why can firms only make normal profit in the long run when under perfect competition?

Firstly it is important to understand the assumptions of perfect competition.They are as follows:-Large number of buyers and sellers-Homogenous (identical) goods-No barriers to entry or exit-Firms are price takersNormal profit for a firm is when revenue is equal to costs and the firm 'breaks even.'In the short run, businesses are able to make profit larger than normal profit which is called abnormal profit. However other potential entrepreneurs may see this and be tempted to set up a business in the market with the aim to make abnormal profits as well. Due to the lack of barriers to entry, many people do the same and more businesses enter the market. This in turn leads to a greater market supply as there are more firms producing the same good. As a result the increase in supply will push market price down to a level where it is equal to a firms average costs.Firms will have no choice but to sell at this price as they are price takers. As a result all firms in the market will only be able to make normal profit. This is best explained next to a detailed diagram.

Answered by Joseph S. Economics tutor

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