Answer to Question #257200 in Economics of Enterprise for Moloko

Question

Illustrated graphically what will happen to the firm’s profits in the long run in a perfectly competitive environment. Assume the firm is currently marking a loss

Answer 1

If the firm in the industry is making an economic loss, new firms will not enter the industry, while some of the existing firms will leave the industry.

The supply curve shifts to the left, increasing prices and lowering losses.

Firms in the industry will continue leaving until the remaining firms no longer make losses i.e. until economic profits equal to zero in the long run.