Question

Why is there no economic profit for perfectly competitive firms in the long run? Why is there no economic loss? Answer this question by using an example of a market or industry where perfectly competitive or close to perfectly competitive firms operate (or run their businesses) in close to 'no economic profit or no economic loss' situation.

Answer 1

Ans ) Perfect competition is the market situation in which there are many sellers and buyers in the market. One buyer or a seller can't influence the price of the good as they are homogeneous goods. So firm is price taker price are determined through the supply and demand of the goods in the industry or set by the industries not by the firm. The elasticity of the good is unity i.e these are perfectly elastic. The demand curve of the firm is horizontal to the X-axis. The eg of the perfect competition firm is Colgate there are many firms which are producing Colgate slightly change price can effect the demand of the Colgate from one firm to the other i.e to cheaper one. There are many buyers of Colgate in the market and as a result single buyer can't effect the price of the Colgate in the market. The firm will earn only normal profit as there is free entry and exit of the firm in the industry. In long run no firm earn super normal or economic profit because of free entry and exit of the firm. If firm will earn super normal profit then it will attract other firms and as result the cost of input price will increase the demand of the product will reduce and the firm will loss the market share as it is not earning more then normal profit in the market. The same situation will occur if firm is facing loss in the market they will leave the market in the long run as they are not covering average cost, so only the firm left in the market which earn normal profit.