Real Estate Council of Alberta Fundamentals Practice Exam

What is the principle that states excessive profits lead to opportunities that can diminish those profits?

1. Principal of Consistent Use

2. Principal of Competition

3. Principal of Increasing Return

4. Principal of Surplus Productivity

The correct answer is: Principal of Competition

The principle that states excessive profits lead to opportunities that can diminish those profits is known as the Principle of Competition. This concept suggests that when certain enterprises or sectors experience high profits, it attracts new entrants into the market. As a result, increased competition often leads to a reduction in prices and profits over time. In a competitive market, businesses are incentivized to innovate, reduce costs, and improve efficiency to maintain their market position. This dynamic can lead to a more equitable distribution of profits and benefits across the market, ultimately stabilizing prices and profits for all participants. Understanding this principle is crucial for anyone studying real estate and market economics, as it highlights the natural self-regulating nature of competitive markets. In contrast, other principles mentioned do not specifically address the relationship between profits and market dynamics in the same manner.