Two years ago, a large number of firms entered a market in which existing firms had been earning positive economic profits. By the end of last year, the typical firm in the industry had begun earning negative economic profits. No other events occurred in this market during the past two years.
- Explain the adjustment process that occurred last year.
- Predict what adjustments will take place in this market at the beginning of this year, when other things are equal.
Concept Introduction:
Positive economic profit: Positive economic profit occurs when the total revenue of the firm exceeds total costs. In a
Negative Economic profit: Negative economic profit is a situation in which the total cost of the firm exceeds the total revenue of the firm. In this situation, the firm experience losses that will force them to leave the market.
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