Figure 9-9 The Effect of New Entrants Attracted by Positive Profits
to this new price. New firms will continue to enter, and the equilibrium
price will continue to fall, until all firms in the industry are just covering
their total costs. The industry has now reached what is called a zero-profit
equilibrium. The entry of new firms then ceases. The effect of entry is
shown in Figure 9-9.
Positive profits lead to the entry of new firms; this entry reduces the
equilibrium market price and reduces the profits of all firms. The initial
short-run equilibrium is in part (i) with equilibrium price. At this
price, a typical firm in the industry is producing units of output and is
earning positive profits (since at ). These positive profits
attract other firms who then enter the industry, causing the supply curve
to shift to the right and reducing the market price. The process of entry
will continue until profits are driven to zero. is the final supply curve
and the equilibrium market price has fallen to. At the new market
price, firms have each reduced their output to and are now just
covering their total costs. Notice that each of the original firms is
producing less than before, but because of the new entrants total industry
output has increased from to.
E 0 p∗ 0
q 0 ∗
p∗ 0 >ATC q 0 ∗S 1
p∗ 0
q 1 ∗Q∗ 0 Q∗ 1