Perfect Competition: Long-Run Adjustment

Market Structures · Micro
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D (industry demand) S₁ (industry supply) S₂ (after entry) MC AC AR₁ = MR₁ (before entry) AR₂ = MR₂ (long run)
Supernormal profit attracts new firms into the industry. Market supply shifts right from S₁ to S₂ and the price falls from P₁ to P₂. Each firm's horizontal demand curve falls with it, until price equals minimum average cost. Every firm now makes only normal profit, at output q₂, where P = MC = AC.