The correct option is Firms earn supernormal profits in the long run..
Explanation
Perfect competition is a theoretical market structure characterized by a large number of buyers and sellers, homogeneous products, perfect information, and free entry and exit of firms. In this structure, market forces of demand and supply determine the price, and individual firms have no control over it.
Option Analysis
- Market Demand equals Market Supply. is a characteristic: In any market equilibrium, including perfect competition, the quantity demanded by consumers equals the quantity supplied by producers. This clears the market.
- Firms earn supernormal profits in the long run. is NOT a characteristic: In the long run, firms in a perfectly competitive market earn only normal profits (zero economic profit). If firms were earning supernormal profits, the absence of barriers to entry would attract new firms. This would increase market supply, drive down prices, and eliminate the excess profit. Conversely, if firms were incurring losses, some would exit, reducing supply and raising prices until normal profits are restored.
- Firms are price takers. is a characteristic: Individual firms in perfect competition are price takers. Because each firm supplies a negligible portion of the total market output, they must accept the equilibrium price determined by market demand and supply.
- Consumers maximise their preferences. is a characteristic: In a competitive equilibrium, consumers allocate their budget to maximize their utility (preferences) given the market prices. This leads to allocative efficiency, where resources are distributed according to consumer preferences.
Key Takeaway: The defining feature of long-run equilibrium in perfect competition is the existence of normal profits due to the free entry and exit mechanism; supernormal profits are only possible in the short run.