foggy_mornings Posted November 28, 2011 Report Share Posted November 28, 2011 Hey there economics students, I need help! How is it possible for a firm to earn abnormal profit in the short run, and why can't they earn abnormal profit in the long run (planning time)? Cheers. 1 Link to post Share on other sites More sharing options...
gg14 Posted November 28, 2011 Report Share Posted November 28, 2011 The main thing you need for this question is the diagrams for perfect competition (short run and long run) which (sadly) I can't remember off the top of my head, but if you've got your textbook or notes you should be able to copy.By definition, in perfect competition the good/service is homogenous and there are no barriers to entry and exit (there are a couple more points but these 2 are the key ones) So a firm can easily produce the same product and can freely enter or leave the market. This means that if firms already in the market are earning abnormal profit in the short run, more firms will enter the market in the long run (since they can see that they too could earn abnormal profit) which shifts the supply curve to the right. This continues until there is no more economic profit and no new firms will enter the market (some may leave as well).Try and find the diagrams, it's much clearer when you've got them. I don't have my notes on me, this is just what I can remember of perfect competition!! 1 Link to post Share on other sites More sharing options...
foggy_mornings Posted November 28, 2011 Author Share Posted November 28, 2011 · Hidden by The Economist, November 28, 2011 - Unnecessary Hidden by The Economist, November 28, 2011 - Unnecessary Thank you, it helped! Link to post
CkyBlue Posted November 28, 2011 Report Share Posted November 28, 2011 To answer your question a bit more concisely, I would like to put forward that there wasn't really an explanation that told us how PC firms could make abnormal profits in the short run. That is theoretical, a "what if" question. What is significant is the correction of the market in the long run. To add to the post above, the reason why PC firms cannot make abnormal profits in the long run is because firms will be attracted or dissuaded from the market depending whether the firms are making abnormal profits or losses. If firms are making losses, they will exit the industry, while if firms are making abnormal profits, firms will be attracted to the industry. When new firms join the MARKET, the supply increases, and there is an overall decrease in price. This will shift the perfectly elastic demand curve (also the price per unit) down until normal profits are made for the FIRM (when the demand curve meets the lowest point of the average cost curve) Similarly, when firms exit the market, supply decreases driving the price per unit up for the firms until they are no longer making losses, but normal profit. This is a pretty good explanation with the pictures and all http://centralecon.wikia.com/wiki/Perfect_Competition#Short-run_abnormal_profits.2Flosses 2 Link to post Share on other sites More sharing options...
nathaniaz Posted December 3, 2011 Report Share Posted December 3, 2011 In perfect competition, there is no barriers to entry or exit ( which basically means any firms can enter or leave the industry and copy or make the same products as the other ) and they all produce homogenous products ( all products are the same and identical). Short run: it's possible to make either losses or abnormal profit depending on their average cost of production, marginal revenue, demand...etcLong run: Let's assume that in the short run firms are making abnormal profit by producing a profitable product... as time pass by.. other firms will realise and want to follow producing that particular profitable product. Since it's a perfect competition, other firms can just go into the industry and start producing the same thing. The size of industry gets bigger as more firms enter the industry ( and so the supply increase--> firms are producing the product, hoping they will get abnormal profit too), however, now each firm has a smaller share in the industry because so many of them are producing the profitable product and their abnormal profit is being ' competed away' and shared to each other. That's why in the short run it's normal profit because no other firms are entering anymore into the industry and no firms are going out from the industry. No abnormal profit will be made and neither losses. 1 Link to post Share on other sites More sharing options...
Survival Robot Posted December 11, 2011 Report Share Posted December 11, 2011 Automatic generated message This topic has been closed by a moderator. Reason: Question has been answered If you disagree to this action, please report this post, and a moderator or administrator will reconsider it. Kind regards, IB Survival Staff Link to post Share on other sites More sharing options...
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