Explain why firms cannot make supernormal/abnormal profits in the long-run in a perfectly

competitive market. Your response should make reference to the characteristics of a perfectly
competitive market, and contain one or more diagrams to support your explanation.
The concept of perfect competition applies when there are many producers and consumers in the
market and no single company can influence the pricing. A perfectly competitive market consists
of below characteristics.

There are many buyers and sellers in the market

Each company makes a similar product
Buyers and sellers have access to perfect information and knowledge about price
There are no barriers for entry into or exit from the market.
All firms are price takers, therefore the demand curve is perfectly elastic

All goods in a perfectly competitive market are homogeneous or perfect substitutes where as a
result the demand curve is perfectly elastic. All the firms in this type of market structure are price
takers; if one firm tries to raise the price of the product there will be no demand for that entitys
product. Consumers will move to another.

Why firms cannot make supernormal/abnormal profits in the long-run in a perfectly

competitive market
Long Run is a period of time which is sufficiently long to allow the firms to make changes in all
factors of production. In long run all factors are variable and no fixed costs exists. In long run a
Firm can change their output by changing their capital equipment, which means that the
entrepreneur can adjust plant size or increase their output to achieve maximum profit.
In the long run firms are attracted in to the industry if the existing firms are making supernormal
profits. This is a result of barrier less entry and perfect knowledge. The effect of this entry in to
the industry is the supply curve of the industry shifts right which drives down price until the
point where all super normal profits are exhausted.
When firms start making losses, they will leave the market as there is no barrier for exit and this
will cause a shift of the supply curve left which rise price and enables those left in the market to
derive normal profits.

No Barriers to entry and super normal profits encourage the entry of new firms shifting
market supply and price downward until price fall back to P1. Normal profits are resored.
In the long run, with the entry of new firms in the industry, the price of new firms in the industry,
the price of the product will go down as a result of the increase in supply of output and also the
cost will go up as a result of more intensive competition for factors of production. New firms
will enter in to the market until price is equal to average cost where as a result all firms are
earning normal profits.
The short run cost curve that lies at the lowest point of the long run average cost curve has no
incentive to leave the industry.
Firms will continue leaving the industry until the price is equal to average cost so that firms
remaining in the field are making only normal profits.
Normal profits are the break even or zero economic profit where MR=MC. A firm making
normal profit will remain in the industry.

There are many alternative theories to profit maximization, explain one such
theory.

http://www.yourarticlelibrary.com/economics/perfect-competition/the-long-run-equilibrium-ofthe-firm-under-perfect-competition/37115/
http://www.economicsonline.co.uk/Business_economics/Perfect_competition.html
https://www.intelligenteconomist.com/market-structure-perfect-competition-long-run/
https://mba651fall2007.wikispaces.com/(B)+Perfect+competition+-Interpretation+of+the+longrun+supply+curve+(perfect+competition)