micro

Reasons firms invest in very competitive markets

Reasons firms invest in very competitive markets

Readers Question: Why invest capita in purely competitive industries with equilibrium margins that are razor thin and entrants that erode quasi profits? Suppose volume is not exceptionally large, why then?Economic theory suggests that firms will invest in industries where there is supernormal profit being made. Investment will be more attractive in industries where there is a degree of monopoly power and higher profit margins. However, in the real world, firms can make decisions based on other factors and…