A Firm's Decision to Reduce Costs or Exit the Market
When faced with a falling market price due to increased industry supply, an individual firm must make a strategic decision. To survive, it has to consider whether it can lower its production costs enough to remain profitable at the new, lower price. If reducing costs is not feasible, the logical alternative may be to exit the market by closing the business.
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Ch.8 Supply and demand: Markets with many buyers and sellers - The Economy 2.0 Microeconomics @ CORE Econ
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A Firm's Decision to Reduce Costs or Exit the Market
Market Dynamics in the Coffee Shop Industry
In a city's competitive market for baked bread, the prevailing market price is $5 per loaf. Several new bakeries discover a new, more efficient oven technology that allows them to produce a comparable loaf of bread at an average cost of $3. Assuming no significant barriers to entry, what is the most likely long-term outcome in this market?
Consider a competitive market where the current price for a product is $50 per unit. A new production method is discovered that allows any firm to produce the good at an average cost of $40 per unit. True or False: Despite this cost-saving discovery, there is no incentive for new firms to enter this market.
Market Response to Cost Innovation
Imagine a competitive market where a technological innovation allows new companies to produce a product at a significantly lower average cost than the current market price. Arrange the following events in the logical sequence that would typically occur.
Market Adjustment to Cost Discrepancies
Match each market scenario with the most likely resulting change in market supply and price.
If new companies can manufacture a product at an average cost that is lower than the current market price, there is a strong profit incentive for them to enter the market. This influx of new producers increases the total market supply, which will ultimately cause the market price to ____.
Market Entry in the Autonomous Ride-Sharing Sector
In a competitive market for tablet computers, the current market price is $300 per unit. A company develops a new manufacturing process that allows it to produce a comparable tablet at an average cost of $250. The company's management team is aware that this new process is not patentable and can be easily replicated by other potential new firms. The CEO states, 'We must enter this market aggressively to take advantage of the $50 profit margin.' Which of the following statements provides the most accurate economic evaluation of the CEO's strategy?