Perfect competitive is a market structure characterized by many small firms, which sells homogeneous product, easy entry and exit, and perfect knowledge of market. In the long run, perfect competitive firms only earn normal profit. This is due to the easy entry and exit of firms into the market. Easy entry is mean that a new firm can easily enter the market if it established supernormal profit in the short run, new firms enter the industry and this increase the supply of the product. As result, the price falls and reduces the profit. New firms will continue to venture into this business until the profit reach zero. Easy exit is mean that some of the existing firms will leave the market if there are facing subnormal profit in the industry. The exit of the existing firms from the industry makes the remaining firms to reduce their productions as well as supply and price rises. As the price rises, losses will be reduced. Firms will continue to leave the industry until there are no more losses. This adjustment continues until what firms make in the long-run is only a normal profit.
Normal Profit Diagram
Normal profit is defined as minimum profit required for the firm in the market or the situations where the firm’s total cost equal the total revenue (TC=TR). It is also known as zero profit or breakdown profit. The condition to attain the normal profit is when the price equilibrium is equal to the marginal cost, marginal revenue, average cost and minimum average cost (P=MC=MR=AR=min AC). As a conclusion, a firm which attains normal profit will not leave the market.
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