If a perfectly competitive firm earns greater than normal...

If a perfectly competitive firm earns greater than normal (zero) economic profit, what will happen in the market in the long run? Question 74 options: Firms will continue to earn above normal profit. New firms will enter the market, driving prices down. Demand will eventually decrease, resulting in lower prices.

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00:01 So here we're given a series of questions about perfect competition.

00:04 When profit is greater than zero, what happens? we're given a bunch of answers.

00:10 Let's go through those one by one.

00:13 Existing firms expand.

00:18 Sounds plausible, but there could be some issues there.

00:21 B, move along lrac curves.

00:26 Move along long run average costs to higher q.

00:37 C.

00:38 We are given pressure to reduce price.

00:48 D, new firms, and e, all.

00:56 So let's see if i can sketch perfect competition, right? perfect competition is a story about quantity and price.

01:04 From the perspective of the individual curve, the price is flat, and now they traditionally move, right, they have a long run average cost curve that looks something like this.

01:16 So this here would be zero profit.

01:18 And once the price rises, you would have some ability to profit, right? because now prices are above average costs.

01:27 So what would a firm do in response to this? rising price allowing for economic profit? well, the first thing is they would move up along the lrac curve to expand their operations, right? they would take advantage of their ability to make, well, they wouldn't move all the way.

01:46 They would move up to where marginal cost intersected...

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