In the long run economic profit of all firms in competitive

In the long run, economic profit of all firms in competitive market is zero. One way to tell a firm is competitive is to check if economic profit is zero. Do you agree? Explain.

Solution

Yes, the statement is correct.

A competitive firm (perfectly competitive or monopolistically competitive) will make short run profits as long as the price exceeds average total cost. But in this type of market structure, entry is free. So, new firms get attracted by this short run profit and start entering the market. Such entry increases the number of firms and demand for individual firms go down, eroding the excess (economic) profit.

This entry continues as long as all the firms\' economic profits are eroded to zero, and each firm earns only normal profit.

This characteristic is not present in oligopoly or monopoly.