Assume a competitive market has firms earning large economic profits. What is expected to happen over time in this competitive market and to firm's profits?
Economic profits will attract new firms into the market. This increases market supply and decreases market price. The demand curve facing firms will decline (shift downward). Profits will decline until a zero economic profit (a normal profit) is earned. In the long run, competitive firms can earn only a normal profit.
You might also like to view...
Refer to above figure. If trade were to open up between P and R, where would the world terms of trade locate in the figure above (somewhere on the PC/PF axis)? Would relative wages (w/r) in the two countries become equal? Is this consistent with the
Heckscher-Ohlin model? Explain.
An expansionary fiscal policy may be:
A. offset by lowering tax rates. B. reinforced by raising tax rates. C. partially offset by the crowding-out effect. D. reinforced by the crowding-out effect.
Other things being equal, appreciation of the dollar
A. decreases aggregate demand in the United States, and may decrease aggregate supply by increasing the prices of imported resources. B. increases aggregate demand in the United States, and may increase aggregate supply by reducing the prices of imported resources. C. increases aggregate demand in the United States, and may decrease aggregate supply by reducing the prices of imported resources. D. decreases aggregate demand in the United States, and may increase aggregate supply by reducing the prices of imported resources.
Whenever the general level of prices rises because of continual increases in aggregate demand, we say that the economy is experiencing
A. cost push inflation. B. aggregate supply shock. C. supply-side inflation. D. demand-side inflation.