Practice question · Put in order
Order the long-run adjustment process in a competitive market.
- Price returns to , profit returns to zero
- Existing firms earn positive economic profit
- Demand increases, pushing price above AC
- Market supply increases, price falls
- New firms enter the market
Hints
- The shock must create profit before anyone enters.
- Entry increases supply and pushes the price back down.
Show the answer
- Demand increases, pushing price above AC
- Existing firms earn positive economic profit
- New firms enter the market
- Market supply increases, price falls
- Price returns to , profit returns to zero
Why
Shock, profit, entry, supply increase, zero profit restored, the self-correcting mechanism of competition.
Practise Perfect Competition
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