From Short-run to Long-run in Perfectly Competitive Markets

Every firm would love to earn economic profits in the long-run. This is, after all the whole reason firms exist: to earn profits! But in perfectly competitive markets the likelihood of economic profits being earned in the long-run is very low, due to one key characteristic of such markets: the lack of entry barriers.

Likewise, if losses are being earned in the short-run, the ease with which firms can exit the market mean that, most likely, those losses will be eliminated in the long-run. This lesson will explain and illustrate the adjustments that perfectly competitive markets and firms undertake in the long-run in response to the existence of economic profits and losses. As we will see, perfectly competitive firms will, in all likelihood, break even in the long-run once firms have had the chance to adjust to the levels of profits or losses experienced.

 

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