Share
Explore BrainMass

Under What Conditions Can Firms Earn Long-Run Profits?

Introduction: Based on the pricing and output decisions in the short run, firms in Perfect competition, Monopoly, and Monopolistic competition show an ability to earn abnormal profits. However, it is observed that in the long run, these firms are able to earn only normal profits.

Task: Do you agree with the statement above? Are there any market forms in which firms are able to earn abnormal profits, both in the short- and long-runs? How do you determine profits in the short- and long-run periods in different market forms?

Arrange your answer as follows:
1. Explain the process of profit determination in the short- and long-runs.
2. State the conditions under which abnormal profits cannot be earned in a market in the long-runs.
3. State the conditions under which abnormal profits will be earned in a market, both in the short- and long-runs.

Solution Preview

Introduction: I do not agree with the statement. Monopolies can earn abnormal profits in both the short and long run.

1. In both the short and long run, accounting profit is determined by subtracting the firm's total explicit costs, such as capital and labor costs, from its total ...

Solution Summary

Consider three market structures: perfect competition, monopolistic competition, and monopoly. In the short run, firms in all three markets can earn an economic (abnormal) profit. What about in the long run? This solution answers that question and gives detailed analysis.

$2.19