Final answer:
In a perfectly competitive market, the price is determined by supply and demand. Short-run economic losses become zero in the long run as new firms enter the market when profits are positive, and leave when profits are negative, leading to a zero economic profit equilibrium. Firms in perfect competition can see an increase in short-run profits if demand increases, but this is not sustainable in the long run.
Step-by-step explanation:
How Market Price Is Determined in Perfect Competition
In a perfectly competitive market, the market price of a product is determined by the interaction of market demand and supply. Each firm is a price taker and can sell as much as it wants at the market price, but has no power to influence that price. Entry and exit of firms ensure that the market price eventually aligns with the marginal cost and average total cost of producing the product.
Convergence of Short Run Economic Loss to Zero in the Long Run
In the short run, firms may experience economic profits or losses. However, in the long run, positive economic profits attract new firms to the market, while economic losses drive firms out. This process continues until firms make zero economic profit—where price equals the average total cost—resulting in long-run equilibrium in the market.
Profit Maximization in Perfect Competition
False
. Firms maximize profit by ensuring that marginal revenue equals marginal cost, not by merely maximizing revenue. If a firm only maximizes revenue without considering costs, it may not be operating efficiently, and thus, not maximizing profits.
Demand Increase and Short Run Economic Profit
True
. Due to the price taker nature in perfect competition, an increase in market demand leads to a higher market price in the short run. As a result, firms can experience an increase in short-run economic profit until the entry of new competitors forces the price down back to the level of average total costs.