Question

When some firms enter a perfectly competitive industry in which firms are earning an economic profit, the short-run industry supply curve shifts ________, the market price ________, and each firm's economic profit ________. leftward; rises; decreases rightward; rises; increases rightward; falls; decreases leftward; falls; decreases

Answer 1

Answer: Supply curve - Increases rightwards

Market Price - Falls

Economic Profit - Decreases

Explanation: Perfect Competition market structure is with large number of buyers & sellers , homogeneous products & uniform prices , perfect information and free entry and exit.

'Free Entry and Exit' implies - no firm earns super normal (economic) profits or abnormal losses in long run. When firms are earning economic profits in short run, new firms enter (because of free entry) & the industry supply increase reducing price , which further reduces the super normal profits to normal profits in long run. Similarly - Abnormal losses make firms exit (freely), reduce supply & increase price , hence reducing abnormal losses & resuming normal profits.