Why are no supernormal profits made in perfect competition in the long run?

A perfectly competitive market is a market in which there are many buyers and many sellers who all have perfect information.

There are many firms in the market who all produce exactly the same product and they are all profit maximisers which means they aim to have as much profit as possible.

Supernormal profit is when a firm's total revenue is greater than their total costs whereas normal profit is when they are equal.

Every firm in the market in the long run makes normal profit.

This is because, although in the short run, one firm may create a technical advantage and reduce it's costs (creating supernormal profit), in the long run, because of the perfect information, every single firm will be able to copy the first firm and everyone's total costs will fall but will be the same as eachother's.

After this, to compete with eachother, the firms try to undercut eachother in their pricing strategy to have as much of the profit as possible untill the market price is down to the total cost of production, and no firm will price a product below the total cost.

Therefore, in the long run, because of the conditions of perfect competition, no supernormal profits will be made.

DG
Answered by David G. Economics tutor

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