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.

RB
Answered by Reubin B. Economics tutor

24108 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

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?


Is the demand for food likely to be Price elastic or Inelastic?


Explain what is meant by the rate of inflation and  analyse the main causes of inflation


The price of tea in the UK increased from £7.20 per kilo to £8.48 per kilo. Over the same period the quantity of tea purchased fell from 97 million kilos to 76 million kilos. Calculate the price elasticity of demand for tea.


We're here to help

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

© MyTutorWeb Ltd 2013–2025

Terms & Conditions|Privacy Policy
Cookie Preferences