How do we correctly understand the claim that firms in perfect and also monopolistic competition would...

How do we correctly understand the claim that firms in perfect and also monopolistic competition would make zero profit in the long run?

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Expert Solution

Every seller has the freedom to enter the market both in the perfect competition and monopolistic competition. A firm can earn positive economic profits in the short run as firms are not in a position to enter the market. But, in the long run, any positive economic profits induces new firms to enter the market. It increases the total supply and reduces the market price. This trend continues till profits are reduced to zero.

Rahul Sunny answered 1 year ago

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