Principles of Microeconomics / Unit 7 MIC 0626 worked example, 60 to 90 seconds
Tracing a Demand Increase to the Long Run
The idea
Start from long-run equilibrium. Demand shifts right, so the market price rises. In the short run each firm moves up its marginal cost curve, produces more, and earns a profit, because the price now exceeds average total cost. Profit attracts entry; market supply shifts right; the price falls. Entry stops when the price is back at minimum average total cost. In the new long-run equilibrium, each firm is back at its original output, but there are more firms and industry output is higher.
In practice
Worked example: the strawberry market clears at twenty-five dollars with a thousand farms growing seven flats each. A health report shifts demand right and the price rises to thirty-two. Each farm grows eight flats, since marginal cost of twenty-eight is below thirty-two, and earns about fifty-four dollars, two fifty-six against two oh two. New farms enter; the price slides back to twenty-five; each farm returns to seven flats and zero profit. Industry output is higher only because there are more farms.
Where people slip
Two errors. Stopping at the short run and reporting the profit as permanent; in a competitive industry it is a signal, not a state. And saying each firm ends up bigger; in a constant-cost industry the firm ends where it began and the industry grows by adding firms.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it