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Competitive Long Run Equilibrium

Using diagrams for both the industry and a representative firm, illustrate competitive long run equilibrium. Assuming constant costs, employ these diagrams to show how (a) an increase and (b) a decrease in market demand will upset the long-run equilibrium. Trace graphically and describe verbally the adjustment processes by which long-run equilibrium is restored. Now rework your analysis for increasing and decreasing-cost industries and compare the three long run supply curves.

Level - MBA

Solution Preview

In a constant cost industry, average cost doesn't change as the industry expands. This happens if the industry consumes only a small amount of the input available, meaning that increases or decreases in output - do not affect the price of the input. As a result, the average cost of production for the typical firm doesn't change as the industry grows. The long-run supply curve for such an industry is horizontal at the constant average cost of production. At a lower prices, the quantity supplied would be zero because no rational firm would sell at less than the cost of production; at higher prices, firms would enter the industry until the price dropped to the ...

Solution Summary

Illustration of competitive long run equilibrium and how changes is demand will affect it.

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