Perfect Competition in the Long Run

In perfect competition, there are a large number of buyers and sellers in the market, and the products being sold are homogeneous, meaning they are identical and indistinguishable from one another. In the long run, the market reaches a state of equilibrium where firms earn normal profits.

Normal Profits

In the long run, perfect competition results in firms earning normal profits. Normal profits refer to the amount of profit necessary to keep a firm in business. It is the minimum level of profit required to cover all costs, including both explicit costs (such as rent, wages, and materials) and implicit costs (such as the opportunity cost of the owner's time and capital).

Normal profits do not represent any excess profit above the opportunity cost of the resources used in production. It is the point at which total revenue equals total costs, including the opportunity cost of all resources employed by the firm. When a firm earns normal profits, it is just covering all its costs and earning a fair return on its investment.

Market Equilibrium

In perfect competition, the market reaches equilibrium in the long run. This means that the quantity supplied equals the quantity demanded, and there are no external factors influencing the market price. At this equilibrium point, firms are producing at the lowest possible average cost, and there is no incentive for new firms to enter the market.

Entry and Exit of Firms

In perfect competition, there is free entry and exit of firms in the long run. If firms in the industry are earning super-normal profits, new firms will be attracted to enter the market. This leads to an increase in supply and a decrease in market price until profits return to normal levels.

Conversely, if firms in the industry are earning losses, some firms will choose to exit the market. This reduces supply and increases the market price until losses are minimized and firms are earning normal profits.

Long-Run Equilibrium

In the long run, all firms in perfect competition earn normal profits. This is because the entry and exit of firms adjust the market price until it reaches a level where firms are just covering their costs and earning a fair return. If firms were earning super-normal profits, new firms would enter the market and increase supply, driving prices down. If firms were incurring losses, some firms would exit the market, reducing supply and driving prices up.

Therefore, in perfect competition in the long run, there will be normal profits for all firms involved.