Q. 9 Two years ago, a large number of... [FREE SOLUTION]

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Chapter 23: Q. 9 (page 533)

Two years ago, a large number of firms entered a market in which existing firms had been earning positive economic profits. By the end of last year, the typical firm in this industry had begun earning negative economic profits. No other events occurred in this market during the past two years.
a. Explain the adjustment process that occurred last year.
b. Predict what adjustments will take place in this market beginning this year, other things being equal.

Short Answer

Expert verified

a. The entry of latest firms within the market leads to negative economic profit.

b.Reduction within the market supply tends to extend the costs of products and repair.

Step by step solution

Introduction

An economic profit or loss is that the difference between the revenue received from the sale of an output and also the costs of all inputs used, in addition as any opportunity costs. Possibility costs and explicit prices are excluded from earnings gained while computing net income. Opportunity costs are a kind of implicit cost determined by management and can vary supported different scenarios and perspectives.

Given Information (a)

A substantial lot of new business joined an industry whose existing businesses had profiting. By the end of this year, a firm in this industry was losing money.

Explanation (a)

(a) Entry of recent firms within the markets results in increase the market supply of products and services. Demand for goods and services remain the identical. An increase in supply ends up in a decline within the price below minimum cost, and consequently, the firms start earning negative economic profit. Thus, the entry of latest firms within the market leads to negative economic profit.

Given Information (b)

A large number of firms entered a marketwithin which existing firms had been earning positive economic profits. Bythe tip of last year,the everyday firmduring this industry had begun earning negative economic profits.

Explanation (b)

(b) The firms within the industry would start leaving industry because of negative economic profit. The market supply would increase when firms start leaving the industry. Reduction within the market supply tends to extend the costs of products and repair.