How does an increase in demand in the short run affect a perfectly competitive market? It increases prices and attracts new firms to the market It decreases prices and forces firms out of the market It has no impact on prices but attracts new firms to the market It has no impact on prices and does not affect the number of firms in the market
Question
How does an increase in demand in the short run affect a perfectly competitive market? It increases prices and attracts new firms to the market It decreases prices and forces firms out of the market It has no impact on prices but attracts new firms to the market It has no impact on prices and does not affect the number of firms in the market
Solution
An increase in demand in the short run in a perfectly competitive market typically increases prices and attracts new firms to the market. Here's why:
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Increase in Demand: When demand for a product or service increases, more consumers are willing to buy the product at the current price. This leads to a shortage of supply in the short run as the existing firms in the market may not be able to meet the increased demand immediately.
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Increase in Prices: Due to the shortage of supply, consumers are willing to pay a higher price for the product. This leads to an increase in the market price.
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Attraction of New Firms: The increase in price and demand makes the market more attractive to other firms. Seeing the potential for higher profits, new firms enter the market to meet the increased demand.
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Long-term Market Equilibrium: In the long run, the entry of new firms increases the supply of the product in the market, which brings down the price to its original level, achieving market equilibrium.
So, the correct answer is: "It increases prices and attracts new firms to the market".
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