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Why might a perfectly competitive firm make abnormal profit in the short run but only normal profit in the long run?

In the short run there is a lack of firms in the industry as it is still new and firms have little incentive to enter it yet. This low supply of firms in the market means the market ruling price will be greater than the firms' average total costs, creating abnormal profit [CBAP1].

In the long run however, the condition of perfect information in this market structure means this abnormal profit will signal an incentive to other firms to enter the market as there are no barriers to entry. This will increase the supply of firms creating a new market ruling price at the trough of each firm's average total cost curve so that no abnormal profit can be made.

Reubin B. GCSE Maths tutor, A Level Maths tutor, GCSE Economics tutor...

8 months ago

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