It is possible in the long run for firms to enter or leave the industry; it should be
recalled that this is not feasible in the short run, since it involves a change in
the level of fixed factors employed. Existing firms can also change their scale
and will maximize profit by producing where price equals long-run marginal
cost (P¼LMC). The presence of abnormal profit will always serve to attract new
entrants into the industry, and this factor, combined with firms increasing
their scale, will shift the industry supply curve to the right, in turn causing the
market price to fall. The industry supply curve will shift from S1 to S2 in
Figure 8.2(i), and the market price will fall from P1 to P2. It is assumed here
that there is no change in demand. Such changes are examined in a later
section.
In order to aid the visual presentation, two separate diagrams are shown for
the firm’s situation. Figure 8.2(ii) shows the comparison of the two short-run
equilibria, while Figure 8.2(iii) compares the new short-run equilibrium with
the long-run equilibrium.
At the new equilibrium the price and long-run average cost (LAC) of the firm
are equal, and the firm is now producing at the minimum level of both its new
SAC curve (SAC2) and its LAC curve at the output q2. This is shown in Figure
8.2(iii). At this point all the abnormal profit has been ‘competed away’. There
is, therefore, no further incentive for firms to enter the industry and the firm