Because new firms enter, demand and marginal revenue decrease for those firm who were in the industry prior to the reduction in costs.

    Demand shifts to D2 and marginal revenue to MR2 due to entry. Demand also becomes slightly more elastic as there are now more competitors. Price falls to P3 and profits return to zero. The reduction in costs leads to a new long run equilibrium with more firms and lower prices.

Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved