Question

Explain how economic profits and losses influence the number of firms in a purely competition industry. When is the purely competitive industry at its long run equilibrium?

Answer 1

Ans. When a firm in a perfectly competitive market is earning a profit, then more firms are attracted to the industry. So, they enter the industry and increase the market supply decreasing the price level level. This happens till the point where all the profits are not exhausted i.e. price becomes equal to average total cost and firms start earning normal profit.

Similarly, when firms are incurring losses, many firms exit the industry decreasing the market supply of the good which leads to increase in price of the good. This happens till the point where prices don't become equal to the average total cost and firms start earning a normal profit.

The industry is in long run equilibrium when all the firms are earning a normal profit and nor firm has an incentive to enter ir exit the industry.

* Please don’t forget to hit the thumbs up button, if you find the answer helpful.