Q.Why does a firm under perfect competition earn only normal profit in the long run?

Whenever firms earn more than a normal profit in a competitive industry, that profit itself attracts new entrants because entry is free — and this destroys the very profit that attracted them. …

Perfect competition assumes free entry and exit of firms in the long run. Suppose, in the short run, existing firms are earning a super-normal profit because price exceeds average cost. This profit signals to firms outside the industry that entering is worthwhile. New firms enter, which raises total market supply; with demand unchanged, the increase in supply pushes the market price down.

Firms keep entering — and price keeps falling — as long as any super-normal profit remains. The process only stops when price has fallen exactly to the point where every existing firm earns just a normal profit, i.e. where price equals the minimum point of the long-run average-cost curve:

$P = MR = MC = AC_{\min}$ …

Students sometimes forget the symmetric exit side of the adjustment — the same free-entry/exit logic also raises price back up when firm …