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When a purely competitive industry experiences economic profits, what will happen as a result? Explain and...

When a purely competitive industry experiences economic profits, what will happen as a result? Explain and graph the initial situation and the subsequent changes that will take place.

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Answer #1

The graph:

As we see in panel (b), the firm will produce an output where MR = MC. Price is greater than AC. Therefore, the firm is making profits. When there are profits in this market, more firm will enter. The quantity supplied will increase. This will exert a downward pressure on price. Price will fall till it reaches AC, where price = AC. Firms will operate at zero economic profit. This is the long run equilibrium in perfect competittion.

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