Authors libby rittenberg 499
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greater than the return available in Industry B. That means that firms in
Industry B are earning less than they could in Industry A. Firms in Industry
B are experiencing economic losses.
Given easy entry and exit, some firms in Industry B will leave it and enter
Industry A to earn the greater profits available there. As they do so, the
supply curve in Industry B will shift to the left, increasing prices and
profits there. As former Industry B firms enter Industry A, the supply curve
in Industry A will shift to the right, lowering profits in A. The process of
firms leaving Industry B and entering A will continue until firms in both
industries are earning zero economic profit. That suggests an important
long-run result: Economic profits in a system of perfectly competitive
markets will, in the long run, be driven to zero in all industries.
Eliminating Economic Profit: The Role of Entry
The process through which entry will eliminate economic profits in the
long run is illustrated inFigure 9.14 "Eliminating Economic Profits in the
Long Run", which is based on the situation presented in Figure 9.7
"Applying the Marginal Decision Rule". The price of radishes is $0.40 per
pound. Mr. Gortari’s average total cost at an output of 6,700 pounds of
radishes per month is $0.26 per pound. Profit per unit is $0.14 ($0.40 −
$0.26). Mr. Gortari thus earns a profit of $938 per month (=$0.14 × 6,700).
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
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