In a competitive market, how does the relationship between marginal cost and accounting profit influence market dynamics when firms are making economic profits?

In a competitive market, when firms are making economic profits, it means they are earning more than their total costs, including both explicit costs and opportunity costs. This situation encourages new firms to enter the market because they see the potential for profit. As new firms enter, the overall supply of the product increases, which typically drives prices down. When prices fall, the marginal revenue that firms receive decreases, which can lead to a point where firms' marginal costs equal their marginal revenue, reducing or eliminating economic profits. For example, if a bakery is making a significant profit selling cupcakes, other bakers may start their own shops, increasing competition and eventually leading to lower prices for cupcakes.