How Does A Competitive Market Earns Profit In The Long Run?


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Tariq Habib Profile
Tariq Habib answered
Our analysis of zero profit conditions showed that firms might stay in business for a time even though they are unprofitable. This situation is possible particularly for firms with high fixed capital costs. With this analysis we can understand why in business downturns many of America's largest companies, such as General Motors, stayed in business even though they were losing billions of dollars.
There is then a critical zero profit point below which long run price cannot remain if firms are to stay in business. In other words, long run price must cover out of pocket costs such as labor, materials, equipment, taxes, and other expense, along with opportunity costs such as competitive return on the owner's invested capital.
The conclusion is that in the long run the price in an industry will tend toward the critical point where identical firms just cover their full competitive costs. Below this critical long run price, firms would leave the industry until price returns to long run average cost. Above this long run price new firms would enter the industry, thereby forcing market price back down to the long run equilibrium price where all competitive costs are just covered.
Shalin Choksi Profile
Shalin Choksi answered
When a company enters into a competitive market, they have a fixed mindset that in the initial beginning they are going to suffer a loss as there are many companies already competing in the market. If you are planning to make a profit in the beginning itself, then you need to bring a revolutionary change compared to other such products in the market. The company needs to be well prepared for all the losses they are going to suffer.

In order to pass the first few initial stages of the product, you need to save some costs which you can later recover when the product become popular among the masses. Try cutting down cost on advertising and other promotions and target only a particular type of public who will have the standard of buying the product. After the product gains popularity, you can increase its expansion in the market and eventually it will earn huge profits in the long run.

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