Question

Can a business (restaurant for example) make profits in a competitive industry? Explain.

Answer 1

Yes, a business can make profits in a competitive industry. In fact, in the short-run a business can earn super-normal profit in a competitive industry. However, in the long-run a business will earn only normal profit. This is because entry and exit is free in a competitive industry. So, in the short-run attracted by the super-normal profit more and more firms will enter the industry. However, with the increased supply price will fall and at the same time increased demand for the factors of production will raise the cost of production.

So, in the long-run a business will earn only normal profits.