When a competitive market that comprises firms that face identical cost structures experiences an increase in demand, which of the following is most likely to occur?
(i) new firms will enter the market.(ii) in the long run, price will return to the level that existed before the change in demand
(iii) in the long run, all firms will be producing at their efficient scale

Question

Quizplus · Accepted Answer

In a competitive market with identical cost structures, an increase in demand initially raises prices, attracting new firms (i). Over time, the entry of new firms increases supply, which tends to push prices down towards the original level, assuming costs don't change significantly (ii). Additionally, in the long run, firms adjust their scale of operation to produce at their efficient scale, maximizing profit and minimizing average total cost (iii).

When a Competitive Market That Comprises Firms That Face Identical