11. Explain briefly the following statement referring to the model of perfect co

Question

11. Explain briefly the following statement referring to the model of perfect competition That free entry dissipates economic profit is one of the most powerful insights in economics, and it has profound implications for firm strategy. Firms that base their strategies on products that can be easily imitated or skills and resources that can be easily acquired put themselves at risk to the forces that are highlighted by the theory of perfect competition. To attain a competitive advantage, a firm must secure a position in the market that protects itself from imitation and entry.

Explanation / Answer

Perfectly competitive market conditions allow for easy entry and easy exit for the firms. whenever there is supernormal profit in the market more firms join in and with that, the production is increased and the price comes down. eliminating the profit in the market. This mostly happens with the firms who are selling a product which can be easily imitated.

If a firm in the market has to maintain a profit in the long run, they should produce some goods which can't be easily imitated. It will prevent other firms from copying the product and increasing the supply in the market and allow the firm to earn a supernormal profit in the long run as well. For example, a firm producing a cell phone based on a technology which can't be imitated will make more profits than a firm making a cell phone which can be copied easily.

This is the main reason why the government allows the firm to have a patent on the new product which they have invented and ensured them a better profit for some years.  

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