In a perfectly competitive market, firms in the long run earn zero economic profits. Why?

Question

What will be an ideal response?

Answer 1

In a perfectly competitive market, firms in the long run earn zero economic profits because of free entry and exit. Whenever a few firms earn positive economic profits, that occurrence acts as an incentive for new firms to enter the market. As there are no entry and exit restrictions in a perfectly competitive market, firms can enter and exit at their will. The entry of new firms into the market shifts the market supply curve to the right, which causes a fall in the market price. This process continues until the market price equals the minimum average total cost of the market and all firms earn zero economic profits. Similarly, when firms are earning negative economic profits, a few firms will leave the market, shifting the market supply to the left, and thus increasing the price. This process will continue until all existing firms in the market earn zero economic profits. Zero economic profit means that all opportunity costs are covered, including even a normal profit. This means that the firm is paying all of its bills and covering its implicit costs, including the normal return on its investment. Such a firm is earning enough of an accounting profit to keep it in the industry–no more and no less.