Question

Why a firm can abnormal profits and losses in short run in perfect competition?

Answer 1

Sophia,

Under perfect competition, a firm can earn abnormal profits and losses in the short run. This is because in the short run number of firms remains constant.

• No new firms can enter into the industry, if there exists supernormal or abnormal profits
• No existing firms can exit the industry, if there exists supernormal or abnormal losses.

Based on these conditions, in short run period, there exist situations of abnormal profits and losses.