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Explain Why Some Firms Might Be Able to Continue to Make Supernormal Profits in the Long Run. (15 Marks)

In: Business and Management

Submitted By sammymartin39
Words 388
Pages 2
Supernormal profits are profits that exceed the level of normal profit, which is the minimum profit a firm must make to stay in business. In terms of perfect competition, which is when there is perfect knowledge in a market along with multiple other features, when a business gains information or makes innovative products that advances that perfect knowledge, it means that they make supernormal profits because they are the only firm with that knowledge. These advances could be anything from technological change to changes in the product itself.

In terms of the pharmaceutical industry however, perfect competition is not apparent, because perfect competition does not come into play in real life scenarios. In monopoly markets, the leading firm can also experience prolonged supernormal profits as there is no competition, but the pharmaceutical industry is actually an oligopoly. As of 2013, the leading pharmaceutical manufacturer was Pfizer, with just 9.9% market share. This means that the pharmaceutical industry is more of an oligopoly. Firms are still able to experience supernormal profits despite the higher level of competition.

Pfizer for example, would be able to patent new production techniques, technology and more importantly products so that they would be able to stay ahead of their rivals. So if they released another product, they would be able to ensure that other companies couldn’t copy it, meaning that they’d gain market share over time and allow them to reinvest to increase there level of research and development.

[insert supernormal profits diagram]

Firms achieve maximum profits when marginal revenue (MR) is equal to marginal cost (MC), that is when the cost of producing one more unit of a good or service is exactly equal to the revenue derived from selling one extra unit.

Also barriers to entry could play a big part in them gaining...

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