Explain why the firms in a perfectly competitive industry will earn zero economic profits in the...

Explain why the firms in a perfectly competitive industry will earn zero economic profits in the long run.

I need the answer in 1 hour, please?

Expert Solution

A perfectly competitive market is a market structure characterised by large number of buyers and sellers selling identical products and enjoy free entry and exit into the market.
In the short run, the firms in these markets earn super normal profits as their total revenue exceeds the total cost of production incurred by them.
An increase in profits attracts new firms into the market.
As the new firms continue entering into the market in long run, each firm starts earning less profits as they are forced to sell their goods at lower price to make the customers purchase from them.
Entry of new firms will also increase the total supply in the market which further increases the cost of production for each firm.
When the price falls below the Average cost, the firms start earning zero profits and they will start leaving the market.
The firms will continue to leave the market until the price equals the average cost.

Rahul Sunny answered 1 year ago

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