Economics Perfect Competition Questions
In perfect competition, economic profit plays a crucial role in determining the long-term sustainability of firms. Economic profit is the difference between total revenue and total cost, including both explicit and implicit costs.
In the long run, firms in perfect competition aim to maximize their economic profit. If a firm is earning positive economic profit, it indicates that it is generating higher revenue than its total costs, including the opportunity cost of resources used. This attracts new firms to enter the market, as they see the potential for profit.
As new firms enter, the market supply increases, leading to a decrease in market price. This decrease in price reduces the economic profit of existing firms. This process continues until all firms in the market are earning zero economic profit, known as the long-run equilibrium.
Therefore, the role of economic profit in perfect competition is to act as a signal for firms to enter or exit the market, ensuring that resources are allocated efficiently and preventing excessive profits in the long run.