Suppose the firms in a perfectly competitive industry are earning positive economic profits

Question

How will these positive profits affect the flow of resources into the industry? How will the equilibrium quantity and price change in the industry because of the profits?

Answer 1

A perfectly competitive market is characterized by free entry and exit of firms in the long run. Profits earned by firms in an industry are the rationale behind the entry and exit of firms in that industry. If firms in a particular industry are earning positive economic profits, it will act as an incentive for newer firms to enter that industry. Among the firms that are entering the industry, some would be new firms and some would be firms that are exiting from other industries. In a perfectly competitive framework, firms exit an industry when the industry suffers losses. Guided by profits, some firms exit loss-making industries to participate in the profit-making industries. Hence, the invisible hand guides resources from other industries to the profit-making industry without requiring intervention from any authority. Resources are thus put to their best uses through the functioning of the invisible hand.
When new firms enter the industry, the supply curve of the industry will shift rightward without any change in demand. An increase in supply, without any change in demand, will lead to a higher equilibrium quantity available at a lower equilibrium price.