powderpuffgirl
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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."
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gr8wizard10
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(Original post by powderpuffgirl)
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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.

Image

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.
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powderpuffgirl
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(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.

Image

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
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