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Difficulty: MediumPerfect Competition: Price and Output Determination in Short and Long Run

In the long run, the presence of supernormal (economic) profits in a perfectly competitive industry attracts new firms to enter the market, which increases total market supply and depresses the market price until all firms earn only normal profits.

Answer: Answer

Answer

The statement is True.
The statement accurately reflects the long-run equilibrium mechanism in a perfectly competitive market. Free entry of profit-seeking firms increases total market supply, lowering market price until price equals minimum average total cost and economic profits are reduced to normal profit.

Step-by-Step Solution

1
Identify the long-run structural characteristics of perfect competition.
Perfect competition is characterized by free entry and exit of firms and perfect information.
Free entry ensures that firms can respond without cost or legal restriction to economic profit signals.
2
Trace the market response to short-run supernormal profits (P>ATCP > ATC).
Supernormal profit attracts new competitors, causing the industry supply curve to shift to the right.
An increase in the number of active producers expands total output supplied at every price level.
3
Determine the impact of the supply shift on price and long-run equilibrium.
The rightward shift in aggregate supply lowers the market equilibrium price to the minimum point of ATCATC, where P=MR=MC=ATCP = MR = MC = ATC.
At this point, economic profits are driven to zero (normal profit only), ending the incentive for further entry.

Key Concept

Long-run dynamic adjustment and free entry mechanism under perfect competition
Estimated Time:1m 0s
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Topics

Perfect Competition: Price and Output Determination in Short and Long Run

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