In long run competitive equilibrium, capital will be indifferent as to where it flows. In the short run however, capital will flow to higher profit industries, until long run equilibrium is restored. This is why capital markets are so important to the economy and why attempts to regulate them usually have disastrous consequences. Demand and Supply Capital Markets Initially price is set competitively in the commodity market by the intersection of demand and supply. Investors in the industry experience a one time increase in return on the stock, as stock prices jump to reflect the unexpected increased profitability of the industry.
Investors correctly asses the higher profitabilty of new entry.
New capital flows to entrepreneurs who want to enter the industry. Entry occurs until it is no longer profitable. At this point, entrepreneurs can no longer attract capital to finance new entry, and once again capital is earning the same risk adjusted return everywhere. The indifference principle can be applied to any competitive market In a competitive labor market, all jobs are equally attractive, in every city and in every occupation. In a competitive housing market, all houses are equally attractive, in every locale and in every price range.