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Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms...

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Explain your answer.   

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Expert Solution

In the long run the firm will earn only normal profits. That is there is equality between price and average cost of production. Any economic profit or losses will only occur in the short run and will be removed by entry and exit of new firms which may affect the supply of goods in the market and hence the equilibrium market price.

Rahul Sunny answered 2 years ago
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