CFA Level I · CFA Level I Exam · The Firm and Market Structures
Firms in a perfectly competitive industry are earning positive economic profit in the short run. In the long run, assuming free entry and exit and no change in input costs, the market price will most likely:
The market price will fall until firms earn zero economic profit. Positive profits attract new entrants, which shifts industry supply to the right and pushes down price. Entry stops when price equals minimum average total cost, leaving no incentive for further entry or exit.
- Afall until firms earn zero economic profitCorrect
- Bremain unchanged because firms keep earning positive profit
- Crise as new entrants increase demand for inputs
Explanation
Positive economic profit attracts entrants. Entry shifts the market supply curve right, which lowers the price. Entry continues until price equals minimum average total cost and economic profit is zero. Profits cannot persist in the long run under free entry.
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