Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5  Firm Behavior and the Organization of Industry

Chapter 14 of 36  Firms In Competitive Markets

Section 23 of 24

…

Figure 8 here

…

The market response of fi


rms to a change in demand depends on the time frame.

Firms can enter and exit a market in the long run but not in the short run.

Consider a market for milk, beginning at long-run equilibrium.

Milk-supplying firms are earning zero economic profit, price equals the minimum of Average Total Cost (ATC).

Figure 8 panel (a) shows this initial condition

· quantity sold in the market is Q1

· price is P1

· long-run equilibrium is point A

…

Suppose scientists discover milk has wondrous health benefits.

Panel (b) shows the short-run response

· demand curve for milk shifts from D1 to D2

· quantity demanded and supplied rises from Q1 to Q2

· price rises from P1 to P2

· short-run equilibrium moves from point A to point B

· short-run profits are generated, shown by the shaded area

…

All existing firms respond to the higher price by increasing the amount they produce

Since each firm's supply curve is its marginal cost (MC) curve how much each increases production is determined by their MC curve.

In the new short-run equilibrium the price of milk exceeds ATC so the firms are making profits.

…

Over time, the profit in the market induces new firms to enter.

Panel (c) shows the long-run response.

As the number of firms and quantity of milk supplied increases the supply curve shifts to the right from S1 to S2.

This shift causes the price of milk to fall

Eventually price is driven back down to P1 at the minimum of ATC

· quantity produced has risen to Q3

· profits again are zero

· firms stop entering the market

· the market reaches a new long-run equilibrium, point C

Each firm is again producing at its efficient scale because more firms are in the dairy business.

The price has fallen to P1 = ATC.

… …

Comments

Post a Comment

Popular posts from this blog

Image
  Picture 240805 Cooling off after exercise, weight at 165 pounds. Got to 160 pounds five years ago and have been bouncing between 157 and 168 since. Common sense ways to lose and keep off weight are eat right and light and get lots of exercise. Main exercise is walking, do 1~2 miles most days. Over career worked as a salesman in the steelmaking, fasteners, and auto manufacturing industries, lots of travel in U.S., Canada, Mexico, and Japan. Over the years have visited every U.S. city with a major league, MLB, NFL, NBA, NHL, sports team except Sacramento, have gotten as close as Travis Air Force Base. Often traveled on Sundays, much time on the road so could not eat right and get enough exercise so got heavy, up to 200 lbs. Was on commission and made enough to retire early, eat right and light, get enough exercise, and now spending most time reading and writing. Our Wick branch goes back to the brother of owner of Wick House in Morristown New Jersey and on back to Staines England. Have
Read more
  From article What 10 Years of U.S. Meddling in Ukraine Have Wrought (Spoiler alert: Not democracy). Aaron Mate. April 30, 2024. Section 2. Seeking to capitalize on the unrest in Ukraine in 2013, U.S. figures including State Department official Victoria Nuland, Republican Sen. John McCain, and Democratic Sen. Chris Murphy visited Maidan Square. In a show of support for the movement’s hardline faction, which went beyond supporting the EU trade deal to demand Yanukovych’s ouster, the trio met privately with Tyahnybok and appeared with him on stage. The senators’ mission, Murphy said, was to “bring about a peaceful transition in ukraine.” … The Maidan Movement’s most significant U.S. endorsement came from then-Vice President Joe Biden. “Nothing would have greater impact for securing our interests and the world’s interests in Europe than to see a democratic, prosperous, and independent Ukraine in the region,” Biden said. According to Andrii Telizhenko, a former Ukrainian gov
Read more

HAT Manifesto Part 1/3 - Rubric Cube - 240804 revision

Image
  “The world we see that seems so insane is the result of a belief system that is not working. To perceive the world differently, we must be willing to change our belief system, let the past slip away, expand our sense of now, and dissolve the fear in our minds.” - William James “All experience has shown mankind are more disposed to suffer,while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed.” - Thomas Jefferson “Wherever good fortune enters, envy lays siege and attacks it. And when it departs, sorrow and repentance remain behind.” - Leonardo da Vinci “Struggle is the indispensable accompaniment of progress. If men were entirely social, man would stagnate. A certain alloy of individualism and competition is required to make the human species survive and grow. Without qualities of an unsocial kind men might have led an Arcadian shepherd life in complete harmony, contentment, and mutual love. But in that case all their talents would
Read more