Profits induce firms to enter the industry, shifting out the industry supply curve. (One firm can't shift this curve but many entering can). An increase in supply causes market price to fall from P* to P₂.

   If supply shifts to S₂ price falls but is still above the minimum of ATC. Therefore, firms are still earning profits. Entry will continue as long as profits are greater than zero, since profits are the incentive for entry. The industry still isn't in long run equilibrium.

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