Question

Compare the short run and long run for perfectly competitive firms. How do perfectly competitive firms adapt to market changes in the short run? What can perfectly competitive firms expect in the long run in terms of profits?

Answer 1

In perfectly competitive market, fims are price takers so they set price = marginal cost. They can make positive or negative profits in the short run. In order to optimise, firms will have to constantly adapt their production to the changes in their marginal costs.

There is free entry and exit of firms in the long tun meaning firms are free to enter the industry when there are positive profits when the firm is suffering losses it can exit the market this will continue to happen until the economic profit is 0. So in the long run perfectly competitive firms earn 0 profit.