Economic profits in a perfectly competitive industry will encourage entry of new firms,which will shift the market supply curve to the right.

Question

Quizplus · Accepted Answer

Economic profits act as a signal to new firms that there is potential profit to be made in the industry. This encourages new firms to enter the market, increasing the supply and shifting the market supply curve to the right. This increase in supply ultimately leads to a decrease in price and a decrease in economic profits until they are equal to zero in the long run equilibrium.

Economic Profits in a Perfectly Competitive Industry Will Encourage Entry