Answer to Question #208437 in Microeconomics for Kyle

Question

"What is the point of entering a perfectly competitive industry if it is simply to earn zero profits anyway?" Discuss this statement with reference to the long and short run, as well as to heterogeneity across firms.

Answer 1

Solution

Perfect competition in the long-run is where economic profit is not sustained arrival of new firms in the market will cause the demand curve of the firm to shift downwards bringing down the average revenue and marginal revenue curve. Hence in the long-run will make zero economic profit.

When the price is less than average cost firms are making a loss. As the supply curve shifts left the prices go up thus economic profits will increase until they become zero.

In the short run it is possible for the firm to obtain an economic profit.

This is shown when the price or the average revenue cost is above the average cost. When the price is below the average cost then the firm will be making a loss in the market.

In perfect competition,the commodities are homogeneous and therefore All firms sell an identical product . All firms then become price takers (they cannot influence the market price of their product). For firms to enter a perfectly competitive industry then heterogeneity of products should be reduced.