Answer to Question #209570 in Microeconomics for Jeremy Levu

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

In the long run, perfect competition is when economic profit is not sustained. The arrival of new firms in the market causes the firm's demand curve to shift downwards, lowering the average and marginal revenue curves. As a result, in the long run, there will be no economic profit.

It is conceivable for the company to make a profit in the short term.

When the price or average revenue cost is higher than the average cost, this is displayed. When the price is below the average cost then the firm will be making a loss in the market.