Finally, we can see that profits for the firm have also increased due to the reduction in costs. Prior to the reduction in variable costs profits were the blue shaded area. After the cost reduction profits are the green shaded area, clearly a larger area.
While a cost reduction is good for everyone involved with
the industry in that consumers pay lower prices and the firm is
more profitable, the higher profits and lower costs make entry
more tempting. Barriers that were too costly to keep out new firms
before may well not be adequate to keep out new firms after a
cost reduction.
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