Hey there! Sign in to join this conversationNew here? Join for free
x Turn on thread page Beta

microeconomics question watch

Announcements
    • Thread Starter
    Offline

    0
    ReputationRep:
    can anyone help me with this question please?

    "explain how economic profits act as a signal for resource allocation in a market economy in the long run."
    Offline

    21
    ReputationRep:
    (Original post by powderpuffgirl)
    x
    I'm not sure what level you're studying at but take a look at the signalling/incentive function.

    Suppose I'm a business operating in a purely competitive market. The equilibrium price would be the price in which firms have to sell a good in this market as all competitors would be facing a perfectly elastic demand curve as D=AR=MR. Now imagine there has been recent spike in demand due to popularity (or whatever you want to think), the demand curve for this industry would shift to the right. Other businesses will see there's opportunity to make abnormal profits (in the short-run) assuming production costs stay the same, as the equilibrium price would've increased. More businesses will enter this industry allocating more resources to this specific market. Essentially it's the basis for capitalism.



    Assume C is the new price, you can see the abnormal profits other firms would've seen to enter the market as it provides a lucrative business opportunity, denoted by the area ABCE.

    If you haven't covered market structures, I can provide a more simplistic explanation. I hope this provides some sort of direction.
    • Thread Starter
    Offline

    0
    ReputationRep:
    (Original post by Anonynous)
    I'm not sure what level you're studying at but take a look at the signalling/incentive function.

    Suppose I'm a business operating in a purely competitive market. The equilibrium price would be the price in which firms have to sell a good in this market as all competitors would be facing a perfectly elastic demand curve as D=AR=MR. Now imagine there has been recent spike in demand due to popularity (or whatever you want to think), the demand curve for this industry would shift to the right. Other businesses will see there's opportunity to make abnormal profits (in the short-run) assuming production costs stay the same, as the equilibrium price would've increased. More businesses will enter this industry allocating more resources to this specific market. Essentially it's the basis for capitalism.



    Assume C is the new price, you can see the abnormal profits other firms would've seen to enter the market as it provides a lucrative business opportunity, denoted by the area ABCE.

    If you haven't covered market structures, I can provide a more simplistic explanation. I hope this provides some sort of direction.
    Thanks, I think this is what I needed
 
 
 
Reply
Submit reply
Turn on thread page Beta
Updated: December 30, 2014
Poll
Do you agree with the proposed ban on plastic straws and cotton buds?

The Student Room, Get Revising and Marked by Teachers are trading names of The Student Room Group Ltd.

Register Number: 04666380 (England and Wales), VAT No. 806 8067 22 Registered Office: International House, Queens Road, Brighton, BN1 3XE

Write a reply...
Reply
Hide
Reputation gems: You get these gems as you gain rep from other members for making good contributions and giving helpful advice.