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Resources flow

Along with current technology, assume a firm is generating 400 loaves of banana bread daily. Also, suppose that the least-cost combination of resources in producing those loaves is 5 units of labour, 2 units of capital, 7 units of land, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. If the firm can trade these 400 units at $2 per unit, will it continue to make banana bread? If this firm’s condition is typical for the other makers of banana bread, will resources flow to or away from this bakery good?

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The firm will continue to generates as it is earning economic profits of $40 (Net revenue of $800 minus net cost of $760). If this firm is distinctive, more resources will flow toward banana bread as other potential firms are attracted to the economic profits.

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