Question

each of the statements shown is characteristic of a phase in the development of a competitive market industry. please classify each statement as a cause of firms exiting the market, the number of firms in the market remaining stable, or firms entering the market.

Answer 1

Firms would exit the market in the following circumstances:

• Price is less than average cost
• Firms post an economic loss.

The market would remain stable in the following circumstances:

• No firms earn economic profit

Firms would enter the market in the following circumstances:

• Price is greater than average cost.
• Firms earn both economic profit and accounting profit.

A competitive market industry is characterised by many buyers and sellers of identical goods and services. Market price is set by the forces of demand and supply.

In the long run, firms would earn only accounting profit. If a firm earns economics profit in the short run, firms would enter the industry in the long run. This would reduce economic profit to zero.

In the short run if firms earn economic loss, in the long run, firms would leave the market. As a result, economic profit would rise to zero.

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