Which characteristic of competitive markets is mainly responsible for firms making zero economic profits in the long run?
A) many buyers
B) many sellers
C) similar goods
D) differentiated goods
E) easy entry into and exit from the market

Question

Quizplus · Accepted Answer

In a competitive market, there are many sellers offering similar goods or services, and many buyers with almost perfect information about prices and quality. This means that if a firm tries to charge a higher price, buyers will switch to another seller, and if a firm tries to offer lower quality, buyers will choose a different seller. Therefore, in the long run, firms will only earn normal profits (zero economic profits) because any above-normal profits will attract new entrants into the market, increasing competition and driving prices down. Similarly, any below-normal profits will cause some firms to exit the market, reducing competition and allowing prices to rise. Thus, easy entry into and exit from the market is the main characteristic of competitive markets that prevents the persistence of above-normal economic profits.

Which Characteristic of Competitive Markets Is Mainly Responsible for Firms