Firms in a perfectly competitive industry

Question

Quizplus · Accepted Answer

In a perfectly competitive industry, firms cannot earn economic profits in the long run because there are no barriers to entry or exit. As a result, if firms are earning profits in the short run, new firms will enter the market, increasing supply and driving down prices until the profits are zero. Similarly, if firms are experiencing losses in the short run, some firms will exit the market, decreasing supply and driving up prices until the losses are also zero. Therefore, in the long run, firms in a perfectly competitive industry will earn an economic profit of zero.

Firms in a Perfectly Competitive Industry