Question

A certain brand of vacuum cleaners can be purchased from several local stores as well as from several catalogues or websites. If all sellers charge the same price for the vacuum cleaner, will they all earn zero economic profit in the long run? Explain and include a diagram.

Answer 1

So there are many sellers of the vacuum cleaner selling identical vacuum cleaners and there are many buyers . So this market is can be closest to perfect competition . All sellers charge same price and no seller has market power . So in long run all sellers earn zero economic profits . If in short run there is positive economic profit , more sellers are attracted towards the market due to free entry and exit . This causes rise in supply of the vacuum cleaner . Sellers can enter as local stores , websites etc . Thus the price of cleaner falls until the price reachers where it is equal to marginal cost at minimum point of Average Total Cost ( ATC ) . So each seller earns zero economic profit in long run just as in perfect competition . Opposite happens if firms are facing loss in short run .