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Solution for Why Can a Firm Not Earn Abnormal Profits Under Perfect Competition in the Long Run? Explain. - CBSE (Arts) Class 12 - Economics

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Question

Why can a firm not earn abnormal profits under perfect competition in the long run? Explain.

Solution

Under perfect competition, no firm can earn abnormal profits in the long run. This is because if any firm in the long run earns abnormal profits (that is price > minimum of average cost curve), then new firms are attracted into the market. Due to the new entrants, the production of output increases, which then increases the supply of the output. This puts pressure on the price and price continues to fall, until it reaches the minimum of average cost curve. At the minimum of average cost curve, all the abnormal profits are wiped-out and no firm earns abnormal profit. Thus, in long run, under perfect competition, no firm can earn abnormal profits, rather earns zero economic profit.

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Solution for question: Why Can a Firm Not Earn Abnormal Profits Under Perfect Competition in the Long Run? Explain. concept: Features of Perfect Competition. For the courses CBSE (Arts), CBSE (Commerce)
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