Question

In the I H, the number of firms can change due to entry and exit. If existing firms earn positive economic profits, new firms may enter the market. Bills, a market maker, applies a shift in supply, reducing profits and slowing entry. Explain the consequences of this for the market.

Answer 1

Entry of new firms initially leads to temporary economic profits for existing firms in the market. However, this attracts more firms to enter, resulting in increased supply and decreased prices. Economic profits eventually fall for all firms until they reach zero-profit equilibrium.

Step-by-step explanation:

This will temporarily make the market price rise above the minimum point on the average cost curve, and therefore, the existing firms in the market will now be earning economic profits. However, these economic profits attract other firms to enter the market. The entry of many new firms causes the market supply curve to shift to the right. As the supply curve shifts to the right, the market price starts decreasing, and with that, economic profits fall for new and existing firms. As long as there are still profits in the market, entry will continue to shift supply to the right. This will stop whenever the market price is driven down to the zero-profit level, where no firm is earning economic profits.