ACCA Advanced Performance Management (APM) Practice Exam

In perfect competition, there are many firms competing in the market, selling identical products. Due to this high level of competition, firms have little to no pricing power. In the long run, if a firm in a perfectly competitive market earns an economic profit, this will attract new entrants to the market. As new firms enter, the supply of the product increases, which drives down the market price. Eventually, the price will fall to the point where firms only earn a normal profit, which is just enough to cover their opportunity costs. In this scenario, entry and exit of firms ensure that all firms ultimately break even, resulting in no economic profit in the long run. In contrast, other market structures like monopolies or monopolistic competition can sustain economic profits in the long run due to barriers to entry or product differentiation, whereas oligopoly can result in varying profit levels depending on the competitive behavior of the firms.