why do competitive firms earn zero economic profit in the long run

Expert Solution

Competetive firms features

Many sellers and buyers: like no one will influence market price

Free entry and exit

perfect knowledge: every consumer know what market price is and quality of goods

No need of advertisement

etc.

what is long run:

Long run is time where all the inputs are variable

why do competitive firms earn zero economic profit in the long run:

The market equilibrium price in long run is equal to average total cost because if firms are earning the profit in short run then the market attracts more firms up to the profit is zero and if the market is in losses then some of the firms leave the market up to the profit is zero. This is helped by the term no one has the influence on price in market because if the firms have power over price then there will be low production and profit will remain in industry like monopoly but in this case the firms have no power over entry and exit so that if profit is there new firms will enter.

Rahul Sunny answered 2 years ago

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