Question

If new technology in a perfectly competitive market brings about a substantial reduction in costs of production, how will this affect the market?

Short answer

If new technology results in a significant reduction in production costs in a perfectly competitive market, the market's profitability will increase.

Step-by-step solution

Definition

The perfect competition takes place if all firms sell similar items, market share has no effect on the price, companies can enter and exit without hindrance, buyers have perfect or complete information, and companies cannot determine prices.

Explanation

If new technology results in a significant reduction in manufacturing costs in a completely competitive market, the market's profitability will grow. Thus, new firms will enter the market and more quantity of the product will be produced.