Question

Summary #4 of Ch. 21 Industry Supply states: “If there are forces preventing the entry of firms into a profitable industry, the factors that prevent entry will earn economic rents. The rent earned is determined by the price of the output of the industry.” What does this statement mean? Using an example to argue if you think it is necessary.

Answer 1

The given statement strictly tells about the market power that lies with the firms already existing in the industry and if there are forces or barriers that prevent the firms to enter the industry what happens is that the concentration is limited to few firms in the industry as a result of which what happens is that the power to same industry because it is limited allows them the freedom to set their own price as a result of which they will price the product or service above the market price or equilibrium so that more profits can be generated as a result of which these prophets can be termed as economic rents earned due to market power. That is why for instance when you consider the case of airlines they can always charge a profitable outcome to earn profits because this isn't a perfectly competitive market and that is the reason why they can an economic rents