2 Answers | Add Yours
A farm will earn only a normal profit if it is in perfect competition. Many textbooks give farms as a possible example of this market structure.
In perfect competition, the firms (or in this case farms) are producing a homogeneous product. That means the produce from one farm is just the same as that from another so buyers will not prefer one farm to another.
In perfect competition, it is easy for new firms to start up.
If you put these two together, you can see why the farm earns only a normal profit. If a farm is earning economic profit, others will see that and they will want to farm as well. Since it is easy to get started, more farms will spring up. Since the product is homogeneous, buyers will not prefer any farm's products so the prices will have to be the same for all farms.
This means that the prices that all farms receive will have to go down if they are making economic profit. If economic profit is made, more farms enter the market. They drive the price down until only a normal profit is made.
Farming comes under perfect competition and one of the feature or characterstic of perfect competition is free entry and exit or easy entry and exit. In long run all firms under perfect competition earns only normal profit because if in case firms are earning profit in short run, other potential firm will enter the market in long run. this will increase the supply and price will come down till it is equal average cost. in the same manner if firms are incurring loss in short run, few firms will leave the market in long run, this will decrease the supply and price will increase up to a point where it is equal to average cost. thus normal profit in long run in both the situtation.
We’ve answered 318,957 questions. We can answer yours, too.Ask a question