Question

Demand for bikes has suddenly increased, and the market price has risen from $50 to $60.

In three to five sentences, explain how this change will affect profits.

Answer 1

A higher market price from $50 to $60 raises the revenue per bike by $10, so—holding costs constant—profit per unit increases and each firm’s total profit rises as they expand output until marginal cost equals the new price. If the new price exceeds average total cost, firms earn positive economic profits in the short run. In the long run those profits attract entry, increasing supply and driving the price back down toward the break-even level, eliminating economic profits.