Supernormal profit draws new firms into a market

A firm earning supernormal profit shows everyone else that the market pays. In a competitive market, profit is a red cape that incites businesses to charge: firms already there have a reason to expand, and new firms have a reason to start up. A petrol station on a busy junction soon finds a rival opening across the road, perhaps with a coffee bar or a car wash to lure drivers. A restaurant known for one sauce finds others copying the recipe or launching their own.

Each new rival takes customers, and the first firm's profit shrinks

Every firm that enters takes some buyers away, so at any price the original firm sells less than before: the demand it faces shifts to the left, and its profit falls. While any supernormal profit is left, more firms keep coming in. Entry stops only when the price has been pushed down to average cost and firms earn normal profit, the return their resources could earn in their next best use. Losses work the same way in reverse, as firms leave.