A businessman is trying to discourage his partner from enter

A businessman is trying to discourage his partner from entering a newly established perfectly competitive market arguing that such a market would not present an opportunity for economic profit in the long run. Is he right? If so, why? Provide a brief but precise answer.

Solution

The businessman is right because firms in perfectly competitive market are not able to make any economic profit in the long run. The reason is that there is a free entry and exit in a perfectly competitive market. This indicates that if there are economic losses in the short run firms will start leaving in the long run and if there are economic profits in the short run firms will enter in the long run.

This will vanish all the economic loss or economic profit that was prevailing in the short run and hence there will be no economic profit and loss in the long run. Suppose that a particular firm enters in a perfectly competitive market which is currently in the long run equilibrium where there are no economic profits for any firm. If there is a economic change that increases the economic profits of the companies working in the market, in the short run there will be no entry and exit so firms will keep enjoying economic profit.

But during the transition from short to long run, many new firms will enter into the market by observing and getting attracted by the economic profit. More and more firms will enter the market the and so supply will increase and the price will fall down. This reduction in the price will ultimately reduce the profit and the process of entry will stop only when there are no more economic profits. This shows that there are no economic profit in the long run.