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Chapter 7: Q.24 (page 210)

Why does entry occur?

Short Answer

Expert verified

Entry occurs as a result of the industry's above-average profit margins.

Step by step solution

01

Introduction

Entry-level firms that are just starting out in a given industry.

02

Explanation

Supernormalprofitoccurswhenacompanyearnsmorethanitstotalcostofproduction.
Ifexistingfirmsintheindustrymakeahigher-than-normalprofitintheshortrunasaresultofmarketdemandconditions,newfirmsmaybeenticedbytheprofitandwillingtoentertheindustrytodobusinessandearnprofit.
Newenterpriseswillentertheindustryinthelongrun,increasingthesupplyofthehomogeneousgood.
Theincreaseinsupplywilllowerthemarketpriceifthedemandsituationremainsunchanged.
Thesupernormalprofitwillbeerodedasaresultofthis.
Theprocesswillcontinueuntilalloftheindustry'ssupernormalprofitshavebeenwipedoutandallfirmsaremakingnormalprofits.

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