Question

Ardenia is a​ small, open economy. its market for breakfast cereals can be considered​ competitive, with many producers and limited product differentiation. at the current market price of​ $10, a representative firm supplies​ 1,000 twenty-ounce packs of cereals per month. this allows the firm to earn​ $1,500 in economic profits. when the demand for cereals increased and the price went up to​ $10.5 per​ twenty-ounce pack, an industry analyst claimed that this would ensure a higher market share for each existing producer. this conclusion is flawed​ because:

Answer 1

Market share represents the percent of sales that a single company has in respect to the total market sales, e.g. this company sells 1,000 packs, and the total market equals 10,000 packs, then it has a 10% markets share.

In a competitive market where products are very similar, all suppliers and consumers are price takers. That means that no one can set the price by themselves. If all the suppliers increase their price to $10.50 per pack, they might earn higher profits and sell a higher quantity of products, but that increase is the result of the total quantity demanded increasing and should affect all the suppliers, not only one. So this supplier's market share should remain the same.

Answer 2

An open economy is one where trade of services and goods can easily take place. Here in this question, it is mentioned that the market for breakfast cereals is competitive, which means that there is not much room for profit making for the existing firms in the market since the products are also not much differentiated.

Hence, the conclusion drawn at the end is flawed because if the demand for cereals get increased and the price went up from $10 to $10.5, the market share for the higher price firm would decrease and people will move towards the firm which is still selling the cereals for $10, since it is a competitive market.

Hope this helps, Thank You.