Answer to Question #131011 in Microeconomics for yasir

Question

Why does a competitive firm make normal profits in long run?

Answer 1

answer

When market conditions allow a firm to earn excess (economic) profit, many other firms are incentivized to to join the market in the short term increasing competition. To remain competitive, firms would incur higher costs and take smaller profits resulting in the loss of economic profit. In the long run, less competitive firms would shut down. Only competitive firms are able to remain in business making normal profits.