Question

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms...

Use a graph to demonstrate the circumstances that would prevail in a competitive market where

firms are earning economic profits. Can this scenario be maintained in the long run? Explain

your answer.

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Answer #1

The above graph shows a firm under perfect market condition earning a supernormal profit. The firm is selling the good at the price of $100 and quantity 30. The green shaded area represents the profit of the firm. For a firm making a profit, it will sell above the average total cost at the level of production.

In the long run, the firm can't maintain such profit because a supernormal profit will attract more and more firms in the market and it will reduce the price and reduce the profit to the point where the firm will only be breaking even.

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