Question

1. suppose that a perfectly competitive firm is earning a positive accounting profit, but there is no incentive for other firms to enter or exit the industry.

Name any two (2) possible reasons that support the above scenario?

Answer 1

A firm can earn profits when the costs are lesser than the revenue earned. In perfect competition, this serves as an incentive for other firms with similar production technologies to enter the market. Hence, the only way any firm in perfect competition can earn profits without attracting new firms into the market are as follows -

1. If the firm has some superior technology which significantly lowers the cost of production which is not at the disposal of the other firms.

2. If a firm has been operating for a long time in such a way that the learning curve has become flat and as a result of long-term operations, the firm enjoys significant economies of scale and lower costs, which is not possible for any new firm entering into the market to emulate as the new firms will have to start from a point on their learning curve that shows significantly higher costs to begin with.