In a competitive market simulation, what is likely to happen as new companies enter the market over time?

• A. Market supply increases, leading to lower equilibrium prices.
• B. Market demand increases, causing prices to fall.
• C. Market demand decreases, causing prices to rise.
• D. Market supply decreases, resulting in higher equilibrium prices.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the basic market structure of perfect competition, where many firms sell identical products and no single firm can influence the market price.
2. Step 2: Recognize that when new companies enter a competitive market, the total quantity of goods supplied at each price level increases, which means the market supply curve shifts to the right.
3. Step 3: Recall the law of supply and demand: an increase in supply, holding demand constant, typically leads to a lower equilibrium price because more goods are available in the market.
4. Step 4: Analyze the effect on equilibrium by combining the increased supply with the unchanged demand curve, which results in a new equilibrium with a higher quantity traded but a lower price.
5. Step 5: Conclude that the correct outcome of new firms entering a competitive market is an increase in market supply and a decrease in the equilibrium price.