Final answer:
Market saturation and intense competition drive firms to introduce new and improved products in order to gain market share. The forces of globalization and new technology have increased competition, making continuous innovation necessary. Firms that can innovate and stay ahead of competitors have the opportunity to earn above-normal profits.
Step-by-step explanation:
Competition from firms with better or cheaper products can reduce a business's profits and may drive it out of business. This is due to market saturation and the constant introduction of new and improved products by firms seeking to gain market share against intense competition. The forces of globalization and new communications and information technology have increased the level of competition faced by many firms, leading to the need for continuous innovation and improvement.
For example, a gas station with a great location may face competition from other gas stations opening nearby and offering additional services like coffee or car wash. Similarly, a successful restaurant with a unique barbecue sauce may have to deal with other restaurants trying to copy or offer their own signature sauces. Market competition provides an incentive for firms to discover new technology and create products that meet consumer demands. Firms that can innovate and stay ahead of competitors have the opportunity to earn above-normal profits.