Question

Define Normal Economic Profit. True or False: A firm in a competitive markets can only earn normal economic profits in the long run.

Answer 1

Normal economic profit refers to when firms are able to cover it's costs through its revenues. It is a situation where it has enough revenues to cover all its costs. Normal profit is otherwise known as zero economic profit.

True, firms in competitive market earn normal profit in the long run. In short run, firms may have positive profit or may incur losses. When the firm earns a positive profit in the short run, many firms get attracted to the profits and enter into the industry. This eventually reduces the profits earned by each firm as there are a lot of competitors. Profits fall. In the long run, firms will earn normal profits. Similarly when firms incur losses in the short run, many firms will leave the industry. This will enable the existing firms to get normal profit.