Question

Using a labelled diagram explain how a firm can revert to making normal profit in the long run from making economic profit during the short run in a perfectly competitive market.

my subject is economics

Answer 1

In short run, perfectly competitive firm enjoys profit because there are less competitors in the market which helps them in maintaining price greater than average total cost.

After observing profits by producers in short run, many new producers starts operating in long run which reduces everyone's profit and firms starts fighting over price to raise their market share which induce every firm to reduce their price which result in fall in profit and induce many firms to shut down. Firms will operate at normal profit where they are just able to cover their cost in long run.