Question

4.       How does the long run economic profit converges to zero in perfect competition? Explain the process starting from short-term profit or loss.

Answer 1

First you have to understand the fact that in a perfect competition there are no barriers to entry and in this regard in the short run where a price is constant and if the average total cost for the product is greater than that of the price what happens is that all the firms are making losses as a result of which few firms start to leave the industry as a result of which the supply decreases and the supply curve shift to the end with this the price increases and ultimately in the long run the price increases in such a way that due to leaving of firms they will settle at a point when there is is zero profit or average total cost is equal to price because if there is more leaving of firms what happens is the price level further increases above the average total cost level so that the profit is positive with which firms will be attracted by the profit as a result of which the firms will enter the industry so that the supply increases second and the price comes doubt such that again it settles at a level where the average total cost is equal to price so that the prophet level is zero and the number of firms existing will be constant in the long run