Question

2. How does a pure competition firm set the price level and quantity output level? Can any pure competition firm earn any profit?

Answer 1

Under perfect competition the firms will produce where the price equals the marginal cost. Thus the quantity will be determined at this point and the price will be equal to the increment in cost. All perfectly competitive firms can earn supernormal profits in the short run as it targets profit maximization. In the long run the entry and exit of firms will ensure that any extra profit or loss is eroded away and all firms earn only normal profits. Thus under perfect competition supernormal profits or losses can be earned in the short run but not in the long run. In the long run it operates where price equals minimum average cost and so only normal profits are earnt.