Question

1. If (perfectly) competitive firms are price takers, how can such a firm make any economic profit in the short run? Can such a firm continue to make economic profit in the long run/ Why/how/why not? Explain.

Answer 1

In the perfect competition one of the firms input remains fixed and they can only change their variable factor such as labor.

In order to make economic profit,the firms will set its marginal revenue = marginal cost so in the short run it is possible for the economic profit to be equal to zero,positive or be negative.When th price is greater than average cost,the firm is making normal profits and when it is less than average cost,the firms make losses.

In the long run however it is impossible for the firms in the perfect competition to make economic profit as in the long run as new firms will be attracted to the market if the firm is making profits and i case the firm is making losses then it would exit the market..New firms would increase the market supply and it will lower the market price to the extent where it is equal to the average cost so the firms will earn zero profits in the long run.There would no incentive for the new firms to enter and for the existing firms to leave the market as they are able to recover their average cost.