Question

A perfectly competitive firm always enjoys normal profit in the long run, irrespective of the situation it faces in the short run. Discuss the statement in brief.

Answer 1

If firms enjoy a supernormal profit in the short run, new firms will enter the industry in the long run, which will cause an increase in the market supply. This will lead to a fall in the price of the commodity until it becomes equal to AC and each firm enjoys a normal profit.

If firms face losses in the short run, they will exit the industry in the long run, which will cause a decrease in the market supply. This will lead to a rise in the price of the commodity until it becomes equal to AC and each firm enjoys a normal profit.