Question

What circumstance might lead a firm in a perfectly competitive market to realize a positive, short-run, economic profit? Explain importance of the absence of barriers to entry in perfectly competitive Markets to long run pricing in these markets

Answer 1

Answer:

If this is the first time that a good is being introduced into the market or the good in question has been developed such that it is better than variants in the perfectly competitive market, it will only be sold by few firms in that market.

This shortage of supply will ensure that the price is higher than the cost of production which means that the company will be making short run positive economic profit.

With an absence of Barriers to entry in a perfectly competitive market, more companies will now be free to enter the market to sell these new goods in the long run so that they may take advantage of the positive economic profit.

This would increase the number of suppliers in the market which would reduce the price of the good till economic profits become zero.

If there were barriers to entry, the prices would remain at a point higher than costs but because other companies were able to come in, the prices reduced in the long run.