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

3674 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Assume the market for Easter rabbits is currently at long term equilibrium. Assume Australia is the largest supplier of easter rabbits. A sudden explosion in the rabbit population of Australia leading up to Easter. How will the market react?


Explain the 'Economic Problem' and how this closely links to the principles of demand and supply and how this ultimately determines the price of goods.


A product with perfectly elastic supply has sales of 100 units per week at a price of £2 per unit. Price elasticity of demand is(-)1 .5 over the relevant range. The government imposes a tax 20%. What will be the government’s weekly tax revenue?


Discuss the likely impact of a depreciation of the pound on the UK's economy.


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:

© 2026 by IXL Learning