Explain why super-normal or excess economic profit may exist for a competitive firm in the short-run.

Expert Solution

Answer-Supernormal profit or excess profit can be defined as the excess profit a firm makes above the minimum return necessary to keep a firm in business.It is calculated by deducting Total Costs from total Revenue. In the theory of perfect competition, a firm is said to earn supernormal profit only in the short run. In the long-term firms will not make supernormal profits but will only make normal profit.

In a perfect competition market structure there is Perfect information among the buyers and sellers and Freedom of Entry and exit of firms. The price in the market is the representative of the demand and supply of the commodity. When a firm earns excess profit due to high demand in the short run,, prices rise and since there is perfect information, other firms will be aware of this fact and as because there are no barriers to entry or exit, new firms will be encouraged to enter the market until price falls back down and normal profits are made in the long run.

Rahul Sunny answered 7 months ago

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