Multiple Choice
Which of the following best describes the role of competitive pressures in a perfectly competitive market?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
In the context of competitive markets, the competitive threat that outsiders will enter a market is weaker when:
A
there are few economies of scale
B
barriers to entry are high
C
existing firms have low costs
D
demand for the product is increasing rapidly
Verified step by step guidance1
Understand the concept of 'competitive threat' in a market: it refers to the likelihood that new firms (outsiders) will enter the market and compete with existing firms.
Recall that barriers to entry are factors that make it difficult or costly for new firms to enter a market. High barriers to entry reduce the competitive threat because they discourage or prevent outsiders from entering.
Analyze the options given: 'few economies of scale' means new firms don't gain much cost advantage by producing at large scale, which can lower barriers; 'existing firms have low costs' can deter entry but is not a direct barrier; 'demand increasing rapidly' can attract new entrants, increasing competitive threat.
Conclude that the competitive threat is weaker when barriers to entry are high, because these barriers protect existing firms from new competition.
Summarize that the key to understanding competitive threat lies in identifying how easy or difficult it is for outsiders to enter the market, with high barriers to entry being the strongest deterrent.
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