Multiple Choice
In the context of competitive markets, the key question of where to compete is addressed by:
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
In a competitive market, if Silver Company makes a product that becomes very popular, what is most likely to happen in the long run?
A
Silver Company will be able to maintain high profits indefinitely due to its popularity.
B
Other firms will enter the market, increasing supply and driving the price down to the level of average cost.
C
The government will regulate the price to prevent Silver Company from earning excess profits.
D
Demand for Silver Company's product will decrease as consumers seek alternatives.
Verified step by step guidance1
Understand the characteristics of a competitive market: many firms, free entry and exit, and identical or very similar products.
Recognize that if Silver Company's product becomes very popular, demand for that product will increase, leading to higher prices and profits in the short run.
Recall that in the long run, the presence of economic profits attracts new firms to enter the market because there are no barriers to entry.
As new firms enter, the market supply increases, which causes the market price to fall.
The price will continue to fall until it equals the average cost of production, eliminating economic profits and resulting in zero long-run economic profit for all firms.
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