Discuss why normal profits are the status quo in a competitive market in the long run:...

Discuss why normal profits are the status quo in a competitive market in the long run: use the competitive market response to change on demand for a commodity to illustrate aspects of your discussion.

Expert Solution

As we know competitive markets are characterised by the free entry and exit of firms which means firms can enter and leave any time. Once the firms in the competitive market start earning the super normal profits new firms will enter the market. As new firms enter the market the supply of goods produced in the competitive market will increase which will lead to fall in the prices of the goods sold in the competitive market that will cause the reduction in the profits and after some time many firms will earn zero or negative economic profit. Because of the zero or negative economic profit many firms will leave the market and only those firms will stay in the market that have potential to bear temporary losses. Firms will keep on leaving the market until the existing firms start earning the zero profits, therefore, in the long run firms in the competitive market only earns zero or normal profits because of the free entry and exit of firms.

Rahul Sunny answered 3 days ago

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