Explain why a firm under perfect competition cannot earn abnormal profit in the long run?

Question

Answer

Under perfect competition there are large number of sellers who sale homogeneous product at the prevailing market price. If any seller try to sale his product on more than market price to earn more profit his product will not purchased by customers. instead of abnormal profit he will face loss.

Answer

In perfect competition market the sellers sell those products which are exactly identical to the products that of different sellers. The products are even same on the basis of colour,size,quality etc. therefore the sellers under PCM cannot earn abnormal profits.

Answer

Introduction:
Under perfect competition, a firm operates in a market where there are numerous buyers and sellers, homogeneous products, perfect information, and free entry and exit. In this market structure, a firm is a price taker, meaning it has no control over the market price and must accept the prevailing market price.

Explanation:
No control over market price:
- In perfect competition, the firm has no control over the market price as it is determined by the interaction of market forces of demand and supply.
- The firm can only adjust its quantity of output to maximize its profit but cannot influence the price at which it sells its products.

Competition and price-taking behavior:
- Under perfect competition, there are many firms producing identical or homogeneous products.
- Due to the large number of firms, each firm's output is a negligible fraction of the total market supply.
- As a result, an individual firm has no impact on the market price and must accept the prevailing market price.

Normal profit:
- In the long run, a firm in perfect competition earns only a normal profit, which is the minimum level of profit required to keep the firm in the industry.
- Normal profit is the opportunity cost of the firm's resources, including the opportunity cost of entrepreneurial skills.
- If a firm earns abnormal profit in the short run, it will attract new firms to enter the market, increasing the total supply of the product and driving down the market price.

Entry and exit of firms:
- In perfect competition, there is free entry and exit of firms in the long run.
- If a firm is earning abnormal profit in the short run, new firms will be attracted to enter the market to take advantage of the profit opportunity.
- As new firms enter the market, the market supply increases, causing the market price to decrease.
- This process continues until the firms in the industry are earning only a normal profit, as the market price adjusts to the long-run equilibrium.

Long-run equilibrium:
- In the long run, all firms in perfect competition earn only a normal profit.
- At the long-run equilibrium, the market price equals the average cost of production, including both explicit and implicit costs.
- Since the firm earns only a normal profit, it is unable to earn any excess profit or abnormal profit in the long run.

Conclusion:
In summary, a firm under perfect competition cannot earn abnormal profit in the long run due to the characteristics of perfect competition, such as the inability to control the market price, the presence of competition, the entry and exit of firms, and the long-run equilibrium where firms earn only a normal profit.

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