Answer to Question #36353 in Economics of Enterprise for pravin

Question

Suppose your firm produces chocolates in a perfectly competitive market and is currently earning zero economic profits. Suppose there is an increase in demand for chocolates after researchers discover that chocolate consumption decreases baldness.
Analyze the short and long-run effects of this increased demand on your firm.

Answer 1

In the short-run the increase in demand will increase the equilibrium price, so the firm will become profitable. But in the long-run all the firms and our firm too will again have zero profit, because new firms will enter the market, as they can gain profits.