Answer to Question #214878 in Economics of Enterprise for LauraG

Question

1. Suppose independent truckers operate in a perfectly competitive constant-cost industry. If these firms are earning positive economic profits, what happens in the long run to the following: the price of trucking services, the industry quantity of output, and the profits of trucking firms?

Answer 1

Suppose that you realize by now, the uniqueness of a Perfect Competition firm. that is, at equilibrium, the ATCmin = Price = AD.

when there are economic profits from PC market (P>ATCmin), thus new entrants are encouraged.

Due to the introduction of more entrants (supply of the PC MARKET shifted to the right), prices go down (thus bringing down the price of the PC FIRM), thus bringing the price of the firms back to normal (P=ATCmin).

the quantity in the MARKET is increased, yet the quantity supplied per FIRM is decreased.

As we all know that, in the long run, perfectly competitive markets make zero economic profits.