Unusually high profits in a development niche attract new builders until profits normalize. Which principle is this?
Correct Answer
D) Competition eroding excess profits
Why this is correct: The principle of competition states that excess profits attract new market entrants, increasing supply until profits return to a normal level. This describes the scenario of high profits attracting builders until normalization. Why the other choices are wrong: 'Substitution disciplining prices' is wrong; substitution affects value by providing alternatives, not specifically the erosion of excess profits. 'Conformity rewarding similarity' is wrong; conformity relates to value being maximized when properties are similar to others in the area. 'Anticipation of future benefits' is wrong; anticipation relates to value being the present worth of future benefits. Exam tip: Competition is the market's profit regulator: supernormal profits are temporary because they invite new supply.
Why This Is the Correct Answer
Why this is correct: The principle of competition states that excess profits attract new market entrants, increasing supply until profits return to a normal level. This describes the scenario of high profits attracting builders until normalization. Why the other choices are wrong: 'Substitution disciplining prices' is wrong; substitution affects value by providing alternatives, not specifically the erosion of excess profits. 'Conformity rewarding similarity' is wrong; conformity relates to value being maximized when properties are similar to others in the area. 'Anticipation of future benefits' is wrong; anticipation relates to value being the present worth of future benefits. Exam tip: Competition is the market's profit regulator: supernormal profits are temporary because they invite new supply.
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