Pure+Competition

Pure Competition: Markets that are purely competitive can be described in three ways; there must be a lot of firms in that market, no significant difference between the products that each firm is selling and it must be easy for new firms to enter that market. Pure competition is best in the view of society because none of the resources are getting wasted because everything is being bought. This is because firms in a purely competitive market are "price takers", meaning that they sell their product for whatever equilibrium price is. They have to be "price-takers" because if they were to raise the price then they would not get any customers since they could go to another seller and get the same good for less, and if they were to lower the price then the would not make as much money since everything is going to sell anyway.

In pure competition, firms can only make a profit or a loss in the short-run. In the long run all profits and losses will even out and every firm will eventually have an economic profit of zero. This is a result of the relative ease of entering the industry. If you are making an economic profit, then other people will see your success and will enter the industry to try and replicate your situation. This causes the demand curve to shift to the right; the price decreases and the quantity increases, reducing the economic profit of all firms. the converse of this is also true, if firms in a industry are making a normal profit but not an economic profit, then some firms will leave the industry, shifting the demand curve to the left and increasing price and decreasing quantity.

When an industry in perfect competition is making economic profit, in the long run firms will (blank) the industry and make (blank) economic profit. a) enter, positive b) leave, negative c) enter, zero d) leave, zero

media type="youtube" key="7lhX78vlHSY" height="344" width="425" This video further explains the conditions of perfect competition and why firms in perfect competition cannot sustain supernormal profits into the long run.

Further links: http://en.wikipedia.org/wiki/Perfect_competition http://william-king.www.drexel.edu/top/prin/txt/Comp/PC2.html http://www.ses.wsu.edu/people/faculty/rosenman/dist301/perfect2.htm

The answer to the earlier question is: (c) firms will enter the industry and the economic profit will lower to zero.