According to microeconomic theory, what will happen to the following things if computer firms are reaping high profits?
suppose you read in a business magazine that compuetr firms are reaping high profits.with the theory of perfect competition in mind,what do you expect to happen to the following over time:computer prices, the profits of computer firms ,and the number of compuetsr on the market?
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First of all, I do not think you should think of computer firms as being in perfect competition. They are not homogeneous products... But assuming that these firms are in perfect competition, you would expect:
- Computer prices would go down because supply would go up.
- The profits of computer firms would go down as the prices went down. If it is perfect competition, they must go down to zero economic profit.
- The number of computers on the market will go up. Again, supply has gone up so the equilibrium quantity sold will go up.
So, the main thing to remember is that if firms are making high profits in a perfectly competitive market, then the supply in that market will rise. From there, you should be able to figure out the rest of those questions.
Here are a few predictions that were not mentioned.
1. Computers would have to get better and more innovative. In fact, I would say that there would have to be some major advancement, or computer companies will not be able to sustain growth. Why would people buy another computer without good reason?
2. In time the number of computers in the world will increase to the point that it might hurt the computer market. Through this, sales may eventually do down.
3. While times are good, many allied companies will do well, such a advertising.
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