![]() As the supply curve shifts to the right, the market price starts falling, and with that, economic profits fall for new and existing firms. As new firms enter, market supply increases and shifts the supply curve to the right to S* (Fig 8.12 B). This induces new firms to enter the market. Now the existing firms make a positive economic profit at output Q1 (Fig 8.12 A). The existing firms in the industry are now facing a higher price than before, so they will increase production to the new output level where P = MR = MC. Let’s say that the product’s demand increases, and with that, the market price goes up. Entry and exit to and from the market are the driving forces behind a process that, in the long run, pushes the price down to minimum average total costs so that all firms are earning zero profit. In turn, a shift in supply for the market as a whole will affect the market price. However, the combination of many firms entering or exiting the market will affect the overall supply in the market. ![]() No perfectly competitive firm acting alone can affect the market price. ![]() 8.6 How Entry and Exit Lead to Zero Profits in the Long Run ![]()
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