Question

Compare  the short run and long run for perfectly competitive firms. How do perfectly competitive firms adapt to market changes in the short run? What can perfectly competitive firms expect in the long run in terms of profits?

Answer 1

In the short run, equilibrium output is when MR=MC. A firm will continue to produce if the average variable costs are covered and even when it is incurring a loss. A firm can earn positive economic profit ( P > minimum ATC) in the short run.

Demand and supply forces are key factors that determine the price in perfectly competitive market. All firms are price takers. and these firms firms can earn positive profits in short run, These firms even can incur loss in short run. These firm will continue to produce if variable costs are recovered.

Over the long run, these firms will not suffer loss. If these firms face loss, they will exit the market. all firms get only normal profit over the long run.

Market changes occur according to available profits in market. If existing firms are earning positive profits, it will induce new entry of firms and supply curve will shift to right thereby pushing up supply and it reduces price level.

Perfectly competitive firm expect only normal profit in long run. Normal profit means zero economic profit, or P = AC.