Question

Explain using properly labelled diagrams, why a perfectly competitive firm will earn only normal profit in the long-run.

Answer 1

Firms can only make normal profits in the long run, although they can make abnormal (super-normal) profits in the short run. If firms receive profits in the short run, then new firms will enter the market, until in the long run the number of firms will be such that P = MR = MC = LATC and LATC will be at its minimum, so all firms will make only normal profits.