Question

DESCRIPTIVE EXAMPLES:

If a competitive industry is currently earning large economic profits then what can be expected to happen to the number of sellers, the price of the product, the volume of output and profits in this industry over time?

Then vice-versa as well:
What if a competitive industry is currently suffering economic losses then what can be expected to happen to the number of sellers, the price of the product, the volume of output and losses in this industry over time?

Answer 1

1.If a competitive indutind in earning supernormal profits in the short run then new firm will be attracted by the profits and new firm's will enter the market (there's no restriction on entry).The supply in the market would rise leading to fall in prices.Eventually the price will fall so much due to excessive supply that some sellers will start leaving the market.When firms leave market the supply falls and price rises such that equilibrium is restored.

Number of sellers-Rise

Price of product-rise

Volume of ooutput-rise

Profit-fall

2.In case the industry is earning losses then firm start leaving the industry.The supply falls resulting in fall in output.In long run the price rises and the losses are covered by the existing suppliers.

Number of sellers-fall

Price-rise

Output-rise

Profit-rise