In long-run equilibrium, firms operating in competitive markets will all earn normal profits.

Question

Quizplus · Accepted Answer

In long-run equilibrium, competitive markets adjust such that firms only earn normal profits, which are the minimum level of profit needed for them to remain in the market. This occurs because if firms were earning more than normal profits, new firms would enter the market, increasing supply and driving prices down until only normal profits are earned. Conversely, if firms were earning less than normal profits, some would exit the market, decreasing supply and driving prices up until the remaining firms earn normal profits.

In Long-Run Equilibrium, Firms Operating in Competitive Markets Will All