Question

1.Why can't perfect competitora make an above-normal profit in the long run?

2. What is the significance that profit maximization for the perfect competitior occurs where P=MC=MR=ATV?

(please give me a short paragraph for each question)

Answer 1

1)

Under the perfect competition, the firm tends to earn a normal profit or zero economic profit over the long run. The firm can earn supernormal profit over the short run but it can not earn the supernormal profit over the long run, there are free entry and exit systems under the perfectly competitive market. Thus whenever firms start earning the supernormal profit, there is a new entry of new firms and these entries wither away the profits.

Thus, over the long run, only normal profit accrues to the firms.

2)

Price is decided by the supply and demand forces. Thus, firms are only price takers in a perfectly competitive market.

When price is fixed, the P = MR, and Equilibrium is established where MR = MC or P = MR= MC=AC.

there will be entry of new firms until the price becomes equal to the AC or P = MC =AC.

Now there is no incentive to enter the market or all firms available in the market earn only the normal profit.

P = MC=MR, is the profit-maximizing point, above this point would add the larger cost relative to the revenue. Hence, overall profit falls.