Firms in perfect competition can only make profits in the short run because

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BlackTom AI · Accepted Answer

Question restatement: The prompt asks why firms in perfect competition can only make profits in the short run.

Given information for options: The provided answer appears to be 'c. in the long run, new firms will enter the market, bringing prices down.' However, the answer_options field is empty, so we do not have the full set of answer choices to analyze directly. I will address the core concept and explain why the stated option (entry in the long run lowering price and eroding profits) is central to perfect competition, along with reasoning about typical alternative options.

Option analysis (conceptual, since actual options are missing):
- Core idea behind short-run profits in perfect competition: In the short run, firms can earn profits because some inputs are fixed and market demand may be high enough to set price above average total cost for a firm. This allows positive economic profit despite many sellers.
- Why profits vanish in the long run due to entry: In a perfectly competitive market, if firms are earning positive economic profits, new firms are incentivized to enter the market because there are no barriers to entry. As new firms enter, industry supply increases, shifting the price downward until economic profits are driven to zero. This is the standard long-run equilibrium: price equals minimum average total cost, and firms earn normal profit (zero economic profit).
- Consequence of entry: The entry of new firms increases total industry output, which reduces the market price until the remaining firms only cover their opportunity costs (normal profit). Because there are many buyers and sellers and no firm can influence market price, profits cannot persist in the long run.

Why this reasoning makes sense and counters common incorrect options:
- If an option claimed profits persist indefinitely in a perfectly competitive market, that would contradict the fundamental entry mechanism and the market’s price-taking nature.
- If an option claimed profits are possible only due to fixed factors or intentional price setting by firms, that would misinterpret the model since firms are price takers and entry should negate sustained profits.
- If an option suggested that profits vanish due to demand shrinking rather than entry of new firms, that would be incomplete; while demand conditions affect profits, the quintessential long-run adjustment mechanism in perfect competition is entry, not merely demand shift, because entry directly expands supply and reduces price.

Summary reflection:
- The central mechanism is that zero economic profits prevail in the long run due to free entry; profits can exist in the short run if price exceeds average total costs, but those profits attract entrants, driving the price down until profits are zero.
- The stated option (entry reduces price in the long run) aligns with this core theory, explaining why profits are possible only in the short run and not in the long run in perfect competition.

MUF0061 Economics Unit 1 - Semester 1, 2025 Perfect Competition- Video and Quiz

Firms in perfect competition can only make profits in the short run because

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