What typically happens to firms in a perfectly competitive market in the long run?

In a perfectly competitive market, firms operate under conditions where there are many sellers offering identical products, and there is free entry and exit in the market. In the long run, the competitive forces within the market drive firms towards a state where they earn only normal profits.

Normal profits occur when a firm’s total revenue equals its total costs, including both explicit and implicit costs. This situation arises because, in the long run, if firms are making economic profits (profits above normal), new firms are attracted to the market. This entry of new firms increases the supply of the product, which in turn drives down market prices. Conversely, if firms are incurring losses, some will exit the market, reducing supply and driving prices up.

As a result of these dynamics, in the long run, firms can only sustain normal profits. This reflects an efficient allocation of resources, where firms cover all their costs, including a normal return on their investment, but do not earn excessive profits that would attract new competitors. Therefore, the tendency for firms in a perfectly competitive market, in the long run, is to stabilize at this point of earning normal profits.