If most firms are making super normal profits in the short run there will be an expansion of the output of existing firms and we expect to see the entry of new firms into the industry. Firms are responding to the profit motive and supernormal profits act as a signal for a reallocation of resources within the market. The addition of new suppliers would result in an increase in supply .
Making the assumption that the market demand remains same, higher market supply will reduce the equilibrium market price until the price = long run average cost. At this point each firm is making normal profits only. There is no further incentive for movement of firms in and out of the industry and a long-run equilibrium is established..
• E is the equilibrium point. At this point MR= MC.
• Drawing a straight line from E to LAC curve gives us the cost of the product.
• Here, LAC=LAR(or price). So, the firm is incurring normal profit