Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is typically the outcome for producers in a perfectly competitive market?

1. Control over prices

2. Ability to make economic profits long-term

3. Entry and exit of firms based on profits

4. Complete protection from market price fluctuations

The correct answer is: Entry and exit of firms based on profits

In a perfectly competitive market, the outcome for producers primarily revolves around the entry and exit of firms based on profits. This market structure is characterized by numerous small firms that sell identical products, which means no single firm has any control over the market price. As a result, producers are price takers, and any excess profits or losses experienced by firms in the short run trigger market adjustments. When times are profitable and firms can earn economic profits, new firms are attracted to the market. This influx of new entrants continues until profits are driven down to zero economic profit in the long run, as the increase in supply reduces the market price. Conversely, if firms incur losses, some will exit the market, reducing supply and allowing remaining firms to potentially increase their prices and move towards normal profits. This dynamic nature of entry and exit based on profitability ensures that over time, firms in a perfectly competitive market will tend to earn only normal profits, just covering their opportunity costs. Thus, the continuous movement of firms in response to market conditions reflects the fundamental mechanism of a perfectly competitive market.