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A-Level Economics · Perfect competition (short-run profit) diagram question

There are no barriers to entry. What happens to this profit in the LONG RUN?

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The diagram

The answer

New firms enter, industry supply shifts right, price falls until AR is tangential to the bottom of AC at F — only normal profit remains. The profit box is a signal. Entry is free, so firms pour in, supply shifts right, price falls to £4 at F — P = AR = MR = min AC, normal profit only. Chain it: supernormal profit ABCE → no barriers to entry → new firms enter → industry supply shifts right → market price falls → the flat AR line drops until it is tangential to the bottom of AC at F → only normal profit is left. Contrast monopoly, where the whole point is that entry is impossible, so the profit survives.

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This is one of 6 questions on the perfect competition (short-run profit) diagram — every corner lettered, every wrong answer diagnosed.

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