Firms in a perfectly competitive industry earn zero profits in the long run because ________.

Question

Quizplus · Accepted Answer

In a perfectly competitive industry, there are no barriers to entry and exit. This means that new firms can easily enter the market when there are potential profits to be earned. As more firms enter the market, the supply of goods or services increases, causing the market price to decrease. This continues until the price is equal to the long-run marginal cost of production, at which point firms in the industry earn zero economic profits. If a firm earns positive economic profits, it will attract new entrants, which will eventually drive down profits to zero in the long run. Therefore, the absence of barriers to entry enables free entry and exit, leading to zero profits in the long run.

Firms in a Perfectly Competitive Industry Earn Zero Profits in the Long