Why cannot firms in perfect competition sustain supernormal profits in the long run?

Define key terms in the question:-The model of Perfect Competition describes a market where there is high degree of competition, with many buyers and sellers in the market.-Supernormal profit is the excess profit a firm makes above the minimum return necessary to keep a firm in business. This creates an incentive for other firms to enter the industry.To understand why a firm cannot make supernormal profits in a perfectly competitive market, it is important to understand what the key characteristics of perfectly competitive markets are:-as highlighted, there are many buyers and sellers in the market, none of whom are large enough to influence price (the Demand curve is therefore horizontal).-there are no barriers to entry or exit.Therefore, if supernormal profits are being made by firms, other firms will enter the market (no barriers to entry), causing a rightward shift in the supply of firms in the market. This will happen until the point where supernormal profits are eradicated. In the long-run, only normal profits can be made by firms operating in a perfectly competitive market.(Graphs are essential)

MF
Answered by Maximilian F. Economics tutor

3110 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

How can you tell the difference between a positive and a normative statement?


What is inflation?


What are two potential macroeconomic effects of a rise in interest rate? (8)


What is the difference between actual output and and potential output?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning