Profit attracts entry

More firms increase market supply and lower price.

Suppose demand rises in a competitive industry. In the short run, price rises, each firm expands along MC, and firms may earn profit. Profit signals that resources earn more than their opportunity cost. New firms enter, shifting market supply right. Price and each incumbent’s profit fall until economic profit is zero.

Entry is an industry event. It does not shift market demand or one incumbent’s cost curve in the constant-cost benchmark. It adds entire firm supply schedules at every market price. The lower market price then moves each incumbent to a smaller output along its own MC.

Resources follow economic profit because it is measured after all opportunity costs. A merely positive accounting profit may be no better than the owner’s next alternative and need not attract entry. The relevant signal is an excess return above normal profit.

Loss produces the reverse chain. Firms exit, market supply shifts left, price rises, and the remaining firms’ losses shrink. Exit does not shift one remaining firm’s cost curve in the basic model. It changes the market price the firm faces.

Entry can raise market output while lowering firm output

Demand rises and price increases. An incumbent expands from 50 to 65 units and earns profit. Entry later lowers price, and the incumbent returns to 50 units. Market output remains above its original level because more firms now each produce 50. Firm and industry directions differ during adjustment.

Exit is not the same as every firm reducing output. A price decline first makes existing firms contract along MC. Long-run exit then removes some firm supply curves and partly reverses the price decline. One action changes quantity per firm. The other changes seller count.

The adjustment takes time and need not be instantaneous. Barriers, uncertainty, and construction delays can allow profit to persist temporarily in an otherwise competitive market. Long-run theory describes the endpoint once entry or exit is possible, not a claim that every market reaches it immediately.

If demand conditions change again, the target moves. Exam questions ordinarily hold demand and costs constant during entry or exit so the chain can be isolated. Preserve that ceteris paribus assumption.

State the entry chain completely: profit attracts firms, firm count rises, market supply shifts right, price falls, each incumbent contracts, and profit disappears. “More firms enter” is true but incomplete when the question asks about price or incumbent output.

Entry can raise total market quantity while lowering each incumbent’s quantity. That apparent contradiction disappears once total output is recognized as the sum across a larger number of firms. The market and firm graphs must be read together throughout the long-run adjustment.

If entry bids up a specialized input, the industry is increasing cost and firm cost curves can shift. The basic chain here assumes constant cost. Add the input-market effect only when the stem states it.