Assume that firms in a perfectly competitive market are earning economic profits.Which of the following statements describes the change in market price and output as a result of the entry of new firms into this market?
A)The market demand curve shifts to the right, causing price to rise and market output to increase.
B)The market demand curve shifts to the left, causing price to fall and market output to decrease.
C)The short-run market supply curve shifts to the right, causing price to fall and total market output to increase.
D)The short-run market supply curve shifts to the left, causing price to rise and total market output to decrease.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms will continue to enter the market until economic profits are driven to zero. As more firms enter the market, the short-run market supply curve will shift to the right, increasing the total market output. However, the market demand curve will not shift as a result of entry, since the demand for the product is determined by consumer preferences and is not influenced by the number of firms in the market. Therefore, the entry of new firms into a perfectly competitive market will result in a lower equilibrium price and a higher equilibrium quantity, as described in option C.

Assume That Firms in a Perfectly Competitive Market Are Earning