FIGURE 9 LONG-RUN ADJUSTMENT WITH SHORT-RUN ECONOMIC PROFITS
Panel A shows a market initially in equilibrium at point a. Industry supply and demand equal S0 and D0, and equilibrium price is P0. This equilibrium leads to the short-run economic profits shown in the shaded area in panel B. Short-run economic profits lead other firms to enter the industry, thus raising industry output to QL in panel A, while forcing prices down to PL. The output for individual firms declines as the industry moves to long-run equilibrium at point b. In the long run, firms in perfectly competitive markets can earn only normal profits, as shown by point b in panel B.