A perfectly competitive firm is initially earning zero economic profit. Then, a decrease in demand for the firm's product occurs. Of the following, in the long run which action listed below is the firm most likely to take?

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms earn zero economic profit in the long run equilibrium. If demand for the firm's product decreases, the price the firm can charge will likely fall, leading to losses. Since firms in perfect competition are price takers and cannot influence market price through advertising or by altering their output significantly, the firm cannot recover its losses by increasing demand or production. Therefore, if the situation persists, the firm is most likely to exit the market to avoid continued losses.

A Perfectly Competitive Firm Is Initially Earning Zero Economic Profit