Question

How can you predict industry changes using supply and demand? Elaborate. What are the sources of Economic Profit? Looking for some original content.

Answer 1

Industry changes can be predicted by the proper use of supply and demand. When demand increases and it shifts to the right, then it can be observed that industry is expanding on the basis increase in income of people, increase in the size of the market, change in taste and preferences. These are the determinants that are used to build demand and decided the direction and size of industry changes.

Further, supply also decides the industry changes, in the way of new technological advancements, cost of raw materials and number of firms in the industry. These determinants give a direction of the movement of the supply in the industry and industry can expand on the basis of these determinants. It increases the output level in the industry with relevant change in supply.

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There are different sources of economic profit. The first source is the product differentiation that makes firms to become price maker. Now, firms can claim higher price than that of the ATC and get economic profit. The second source is the monopoly in the form of patent, copyrights and IPRs owned by the firms that give exclusive rights to the specific firms. It makes them put higher prices and consumers may lack similar alternatives. It creates economic profits to the owner of patents and copyrights. The third source of economic profit is the natural monopoly that happens when one firm makes huge investments and create economy of scale. It becomes a source of economic profit as cost decreases with an increase in output to be produced.