In the short run, if firms meet the demand for their output at preset prices, then the primary cause of expansions are:
The correct answer and explanation is:
In the short run, if firms meet the demand for their output at preset prices, the primary cause of expansions is increased demand for goods and services.
When firms have a fixed price and supply can be adjusted in the short term, they often expand their output in response to higher demand. This demand shift could be due to various factors such as consumer preferences, changes in income, population growth, or even external shocks that increase the desire for certain goods and services. Since firms cannot adjust prices immediately due to the constraints of preset pricing, they typically expand production capacity by increasing labor, utilizing existing machinery more intensively, or working overtime to meet the growing demand.
However, this expansion is limited by the fixed resources available in the short run. Firms will not invest in new capital or technology right away, as these decisions require a longer planning horizon. Instead, they focus on maximizing the use of their existing resources to meet the heightened demand. As demand continues to rise, firms may find themselves operating at or near full capacity, leading to diminishing returns. This often results in an increase in marginal costs, which could eventually prompt firms to adjust prices in the longer run when the capacity constraints and other market dynamics become unsustainable at preset prices.
In summary, the primary cause of expansions in the short run, when firms are meeting demand at fixed prices, is the increase in demand for goods and services. As firms increase production to match this demand, they may face higher costs and eventually adjust their pricing strategy or invest in long-term production capabilities when conditions permit.