Question

explain why super normalor excess economic profit may exist for a competituve firm in the short run

Answer 1

In perfect competition firms make super normal profit but it is possible only in the short run Super Normal Profit or Abnormal Profit is earned when Average revenue is greater than Average Cost. In perfect Competition firm is a price taker and not a price maker. As a price taker it cannot control the market price. The firm's in perfect competition face infinite demand at market price. As a result Average Revenue is equal to Marginal Cost. Also , it remains constant and is equal to marginal cost.

In perfect Competition costs is kept low as there are large number of buyers and sellers. High cost may throw the firm out of the market . The profit maximizing output is determined by condition where Marginal Cost is equal to Marginal Revenue. All this may result in firm earning super normal profit ie. Average revenue is greater than Average Cost.

But this will be possible only in the short run. In the long run this situation will not hold. In perfect Competition there is perfect knowledge and no barriers to entry. When new firns will come to know that existing firms are making super normal profits they will be attracted to join the market. Due to no barriers to entry they can easily do so. As a result the market supply of products will increase. This will reduce the market price. As a result super normal profits will decline due to decline in Average Revenue.

The new firms will keep entering the market till the point no room is left for earning super normal profit and firm is earning only normal profit.

To conclude we can say that in Perfect Competition in long run the Equilibrium is achieved at a point where firms earn only normal profit. The increase competition make it difficult for firms to earn super normal profits in the long run and thus super normal profits only exist in short run in perfect competition.