Q.Explain why every firm in a perfectly competitive industry earns only normal profit in the long run, even though some firms may earn super-normal profit in the short run.

Free entry/exit in the long run drives super-normal profit to zero, since new entrants attracted by profit raise supply and push price down until only normal profit remains.

Short-run super-normal profit signals an opportunity; because entry is completely free under perfect competition, new firms enter the industry, raising total market supply and lowering price, until price falls enough that profit is reduced to exactly normal profit, with no further incentive to enter or exit.

In the SHORT RUN, market price is fixed by the prevailing intersection of overall market demand and supply, and the number of firms in the industry is fixed too (there is not enough time for new firms to build capacity and enter, or existing firms to fully exit). If this short-run price happens to lie above a typical firm's average total cost at its equilibrium output, that firm earns SUPER-NORMAL PROFIT.

But perfect competition is specifically defined by COMPLETELY FREE entry and exit. Seeing other firms earning super-normal profit, new firms are attracted into the industry over time (since there is nothing structurally stopping them — no legal barrier, no unique resource, no large capital requirement they alone could raise). As more firms enter, TOTAL market supply rises (more sellers offering the good), and given unchanged market demand, this pushes the market PRICE DOWN.

This process of entry and falling price continues exactly as long as super-normal profit still exists to attract further entrants — it only stops once price has fallen enough that every remaining and entering firm earns EXACTLY normal profit (zero super-normal profit), at which point there is no longer any incentive for further firms to enter (nor for existing firms to exit, since normal profit is enough to keep them in business). This final position is described by $P=MC=AC_{minimum}$ — price equal to the lowest point of the average cost curve, the industry's long-run equilibrium.

The symmetric argument applies if firms are instead making LOSSES in the short run: some firms exit, market supply falls, price rises, and this continues until the remaining firms are back to earning exactly normal profit.

A common confusion is thinking normal profit means the firm earns "no profit at all" — normal profit is a genuine, positive return that fully covers every cost including the entrepreneur's own implicit cost; it is only SUPER-normal (abnormal) profit, the surplus ABOVE normal profit, that is competed away by free entry.