Future Business Leader Achievments (FBLA) Economics Practice Exam

What attracts new firms to competitive industries that have experienced an increase in demand for their products?

1. Normal rate of return

2. Lower costs

3. Economic profits

4. Marginal revenue

The correct answer is: Economic profits

When a competitive industry experiences an increase in demand for its products, it typically leads to higher prices and, consequently, the potential for economic profits for existing firms. Economic profits refer to profits that exceed the normal rate of return, which is the level of profit that adequately compensates the business owners for the risk they take. For new firms, the presence of economic profits serves as a strong incentive to enter the industry. When they observe that existing firms are earning more than what is considered a normal profit, it signals a lucrative opportunity in that market. This attraction is directly tied to the potential for future profitability. Thus, the possibility of earning economic profits drives new entrants to compete for market share, aiming to capture a portion of those excess returns. While factors like lower costs and marginal revenue are important considerations for firms within the industry, they do not create the same immediate motivation for entry as the prospect of economic profits does. In summary, the ability to earn economic profits in response to increased demand is the primary factor that draws new firms into competitive industries.