Why in PC will long run economic profits be zero? What characteristic of PC drives this...

Why in PC will long run economic profits be zero?

What characteristic of PC drives this result?

Expert Solution

When the existing firms in the market earns positive economic profit, the new firms will be attracted by this profit and enters into the market. So when new firms enter the market, supply of the good in the market increases which leads to a rightward shift in the market supply curve. So, the new equilibrium price falls. This entry of new firms will continue and price continues to fall till all the firms in the market earns zero economic profit.

On the other hand, when the existing firms in the market earns negative economic profit, some of the existing firms will leave the market. So when some firms exit the market, supply of the good in the market decreases which leads to a leftward shift in the market supply curve. So, the new equilibrium price risess. This exit of firms will continue and price continue to rise till all the firms in the market earns zero economic profit.

The Free entry and free exit characteristic of PC drives this result.

Rahul Sunny answered 1 year ago

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