What Happens in a Competitive Industry When More Firms Enter

question 44

Multiple Choice

What happens in a competitive industry when more firms enter?

• A) Demand decreases and the price declines, which in turn lowers profits.
• B) Supply increases and the price declines, which in turn lowers profits.
• C) Supply increases and the price rises, which in turn raises profits.
• D) Demand increases and the price rises, which in turn raises profits.

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Definitions:

Demand Curve

A graph showing the relationship between the price of a good or service and the quantity demanded for a given period.

Short-Run Equilibrium

Short-run equilibrium occurs when in a market, the quantity supplied equals the quantity demanded at the current price, before any long-term adjustments are made.

MR > MC

A situation in marginal analysis where the marginal revenue (MR) exceeds the marginal cost (MC), suggesting a potential increase in profitability by expanding production.

P > ATC

A scenario in which the price of a good is greater than the average total cost of producing that good, indicating potential profitability for the firm.