Question

Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?

Short answer

In the long run, firms achieve a profit of zero. In the long term, if there are too many firms they'll receive negative profit until enough firms leave. If the firms experience positive profit, more firms will enter the market till everyone gets zero economic profit.

Step-by-step solution

Definition

Perfect Competitive Market: A perfectly competitive market is characterized by a large number of buyers and sellers dealing with the same items. These market participants have a perfect understanding of the market, which fosters competition. Because it has both productive and allocative efficiency, this market is efficient.

Explanation

In a fully competitive market, there are no barriers to entry, and all consumers have perfect information.
In the long run, firms achieve a profit of zero. In the long term, if there are too many firms they'll receive negative profit until enough firms leave. If the firms experience positive profit, more firms will enter the market till everyone gets zero economic profit.