competitive price-taker firms ____ earn zero economic profit in long-run equilibrium because ____.
The subject of this conversation is Competitive price-taker firms ____ earn zero economic profit in long-run equilibrium because ____
Answer:
Competitive price-taker firms operating in perfectly competitive markets can indeed earn zero economic profit in the long-run equilibrium due to certain characteristics of this market structure. Here is why:
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Perfect Competition: In perfectly competitive markets, firms are price-takers, meaning they have no influence on the market price. They must accept the prevailing market price to sell their goods or services.
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Zero Economic Profit: In the long run, firms in a perfectly competitive market will adjust their production levels based on profitability. If firms are earning economic profits, new firms will enter the market to take advantage of these profits. This entry of new firms will increase supply, lowering prices until economic profits are reduced to zero.
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Low Barriers to Entry and Exit: Perfectly competitive markets have low barriers to entry. This means that new firms can easily enter the market. If existing firms were making economic profits, new firms would enter the market, increasing supply and reducing prices until profits are eliminated.
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Product Homogeneity: Firms in perfectly competitive markets sell homogeneous (identical) products. This leads to intense competition based on price. If a firm tries to charge a price higher than the market price, consumers will switch to a cheaper alternative.
In conclusion, competitive price-taker firms can earn zero economic profit in long-run equilibrium because of the forces of entry and exit, product homogeneity, and the inability to influence market prices due to perfect competition.