Perfect Competition and Normal Profit:

Perfect competition is a market situation where there are a large number of buyers and sellers, and every seller sells an identical product. In a perfectly competitive market, firms make normal profit in the long run.

Normal profit refers to the minimum amount of profit required to keep the firm in business. It is the opportunity cost of the resources used in the production process. In other words, normal profit is the cost of the entrepreneur's time and effort in managing the business.

Under perfect competition, firms earn normal profit in the long run because of the following reasons:

1. No Entry Barriers: In a perfectly competitive market, there are no entry barriers. Any firm can enter or exit the market without incurring any costs. This means that if a firm is making supernormal profit, new firms will enter the market, and the supply will increase, reducing the price and profit margins of the existing firms.

2. Homogeneous Product: In a perfectly competitive market, all firms sell an identical product. This means that consumers do not have any preferences for a particular brand or product. As a result, firms cannot charge a higher price than their competitors, and the price is determined by the market forces of demand and supply.

3. Perfect Information: In a perfectly competitive market, all firms and consumers have perfect information about the price and quality of the product. This means that firms cannot charge a higher price than their competitors, and consumers can easily switch to another firm if they find a better deal.

4. No Market Power: In a perfectly competitive market, no firm has market power. This means that firms cannot influence the price of the product by their actions. They have to accept the market price, which is determined by the forces of demand and supply.

Conclusion:

In conclusion, under perfect competition, firms make normal profit in the long run because of the absence of entry barriers, the homogeneity of the product, perfect information, and the absence of market power. This means that firms cannot earn supernormal profit, which is the excess of revenue over the opportunity cost of resources used in the production process.