Question

Explain how only normal profit can be made in the long term for firms operating under perfect market conditions. Give some practical examples of this process and indicate how some large firms (such as Microsoft and Coca Cola) have managed to make economic profits over extended periods of time.

(20 marks)

Answer 1

In long run all sector of production are variables under perfect competition there are also two assumption

1- Free entry and exit

2- Perfect resources movability

When firm making abnormal profit which attract lots of new firms and they will start to enter freely due to two assumption because of it supply of goods and product will increase and it cause decrease in price of goods and products in market andit continue till the existing firm make zero economic profit and also due to increase in number of firms in perfect competition market firms also start making losses which cause and make them unable existing firm and they start to exist the market until the remaining firm are able to earn normal profit and again the supply of goods and product decrease and price of industry increase that's why in long run firm earn only normal profit.

In economic term, economic moat is word that define the ability of business to maintain its long term economic profit and competitive advantage over its competitors. There are several moat that company used to protect its profit.

1)Cost advantage- under this advantage company or firm supply lots of goods and products in market due to their higher demand and which is eventually decrease cost of production and other cost of firm which helpful in maintaining economic profit.

2)Size advantage- no doubt existing firm are large in size and due to this large scale of production takes place in it and due to large production large amount of raw material are required which they get at low cost it also help in profit maintenance.

3)Intangible - In profit maintenance Goodwill are also helpful and play a major role in long term and no doubt Goodwill are earn by such items such as patents, strong brand recognization , government license which boosts profit.

Unique corporate culture, unique leadership and corporative environment also helpful in maintaining economic profit success in long term.

There are some Practical Examples

Microsoft , coca cola, PepsiCo, Nestle which are used such moat to make economic profit over extended or long period of time.