If firms in a perfectly competitive industry are earning positive economic profits, then what will happen in the long run?

What will be an ideal response?

ANSWER:


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Economic profits provide incentives for entrepreneurs to start new firms and enter the industry. When entry of new firms takes place, the market supply curve shifts outward. The equilibrium quantity increases, and the market clearing price declines. This pushes economic profits back down toward zero. When economic profits return to zero, there is no longer an incentive for new firms to enter the industry, and a new long-run equilibrium will have been reached.