Question

Explain what is the fundamental characteristic that distinguishes the short-run from long-run of perfectly competitive market?

Answer 1

The fundamental characteristic which differentiates the short run and the long run of the perfectly competitive market is that the firms in the short run can earn a supernormal profit or loss. In the long run, the firms can enter the market and leave it.

If the firms are making a loss in the short run, they will exit the market and it will continue to the point where there are no more loss-making firms in the market. Similarly, if the firms are making a profit more and more firms will enter the market and it will continue to the point where the no more profit is in the market.

So, in the long run the firms only break even i.e. no profit and no loss. In the short run there is profit and loss.