Solve this:
Dear student,
Firms in perfect competition, earns a normal profit because the cost structure of all the firms are same as they produce homogeneous products. Also, the selling price is same as firms are price taker. Therefore, Selling price - Cost = Uniform profit.
In a perfect competition, there is free entry and exit of firms and due to this the firm earns only a normal profit in the long run. Due to free entry and exit, equilibrium occurs at the point where Price = Minimum AC, and when P = minimum AC then each firm will earn normal profit.
* As when the firm starts earning super normal profit in the short run, new firms get attracted to it and start entering into the market, which in turn brings down profits to normal.
* When firm starts incurring loss in the short run, some of existing firms start leaving the industry till the firms start earning normal profits.
Regards
Firms in perfect competition, earns a normal profit because the cost structure of all the firms are same as they produce homogeneous products. Also, the selling price is same as firms are price taker. Therefore, Selling price - Cost = Uniform profit.
In a perfect competition, there is free entry and exit of firms and due to this the firm earns only a normal profit in the long run. Due to free entry and exit, equilibrium occurs at the point where Price = Minimum AC, and when P = minimum AC then each firm will earn normal profit.
* As when the firm starts earning super normal profit in the short run, new firms get attracted to it and start entering into the market, which in turn brings down profits to normal.
* When firm starts incurring loss in the short run, some of existing firms start leaving the industry till the firms start earning normal profits.
Regards