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Introduction
In explaining the model of pure competition, we assumed for simplicity that all the firms in an industry had the same cost curves. Competition, as a result, only involved entrepreneurs entering and exiting industries in response to changes in profits caused by changes in the market price. This form of competition is important, but it is just a game of copycat because firms entering an industry simply duplicate the production methods and cost curves of existing firms in order to duplicate their above-normal profits. In this type of competition, there is no dynamism and no innovation, just more of the same.
By contrast, the most dynamic and interesting parts of competition are the fights between firms over the creation of new production technologies and new products. Firms have a strong profit incentive to develop both improved ways of making existing products and totally new products. To put that incentive in context, recall one fact that you just learned about long-run equilibrium in perfect competition. When each firm in a purely competitive industry has the same productive technology and therefore the same cost structure for producing output, entry and exit assure that in the long run every firm will make the exact same normal profit.
Directions
According to the basic model of pure competition, in the long run all firms in a purely competitive industry will earn normal profits. If all firms earn only a normal profit in the long run, why would any firms bother to develop new products or lower-cost production methods? Explain.
