Competitive Equilibrium

Abstract

WE have so far considered only a given number of firms. It remains to consider the reaction of monopoly profit on the number of firms producing a given commodity. A change in the number of firms will alter the demand curve for any one firm, and may alter its costs. It is customary to regard the level of profits in an industry as governing the entry of new firms. Normal profits is that level of profit at which there is no tendency for new firms to enter the trade, or for old firms to disappear out of it. Abnormally high profits earned by existing firms are regarded as inducing new firms to begin to produce the commodity, and abnormally low profits, by leading to a cessation of new investment, are regarded as leading to a gradual decline in the number of firms in the industry.¹