Market Response to High Profits
A small number of firms in a specific industry are currently earning significant economic profits due to a sudden surge in demand for their product. Analyze the two distinct types of long-run responses that these short-run profits are likely to trigger within the market. For each response, identify the actor (e.g., existing firms, potential new firms) and explain the underlying economic incentive driving their decision.
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.8 Supply and demand: Markets with many buyers and sellers - The Economy 2.0 Microeconomics @ CORE Econ
Analysis in Bloom's Taxonomy
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A company in a competitive market develops a new, highly efficient manufacturing process that significantly lowers its production costs, allowing it to earn substantial economic profits at the current market price. If this new process is not protected by a long-term patent and can be replicated by others, what is the most likely long-run adjustment in this market?
A market is initially in a state where the typical firm is earning profits significantly above its normal rate of return. Arrange the following events to show the logical sequence of how the market adjusts to a new long-run state.
From Short-Run Profits to Long-Run Equilibrium
Market Response to High Profits
In a market characterized by low barriers to entry, the existence of substantial short-run economic profits for incumbent firms is a strong indicator that those same firms will also earn sustained, above-normal profits in the long run.
Match each short-run market condition with the most likely long-run adjustment that will occur, assuming low barriers to entry and exit.
An entrepreneur is analyzing a market where incumbent firms are currently earning substantial economic profits. From the perspective of making a long-term investment decision to enter this market, which of the following factors is the most crucial to assess?
Strategic Response to Short-Run Profits
Contrasting Market Adjustments