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 21 of 22
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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
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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
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At this point all existing firms respond to the higher price by increasing the amount they produce and raise their price to P2.
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 P2 price of milk exceeds ATC so the firms are making profits.
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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.
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Why do producers of a good increase their price when amount demanded for the good increases?
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When the amount demanded for a good increases, producers might increase their prices due to a few key economic principles:
Supply and Demand Balance:
The fundamental economic theory of supply and demand states that when demand for a product increases (and supply remains unchanged), the price will tend to increase.
This is because more consumers are competing to buy the same amount of goods, which leads to higher prices.
Maximizing Profits:
Producers often increase prices in response to higher demand as a way to capitalize on the willingness of consumers to pay more.
This is especially true if the product is in short supply or has a unique value proposition.
By raising prices, producers can increase their revenue and profits.
Cost of Production:
Sometimes, an increase in demand can lead to higher costs of production.
For example, if a producer needs to pay overtime to workers or expedite shipping to keep up with demand, these increased costs can be passed on to consumers in the form of higher prices.
Market Signals:
Price increases can also serve as a signal in the market.
Higher prices can encourage competitors to enter the market or existing producers to increase their production, eventually helping to balance supply with the new level of demand.
Conversely, it can signal consumers to reduce their consumption or seek alternatives, helping to dampen excessive demand.
Price Elasticity:
The decision to increase prices also depends on the price elasticity of the good. If the good is inelastic (consumers continue to buy it despite price increases), producers are more likely to raise prices when demand increases.
If the good is elastic (consumers buy less when the price goes up), producers will be more cautious about raising prices.
Overall, price adjustments in response to changes in demand are a way for the market to allocate resources efficiently and for producers to navigate their economic environment.
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initial condition
shoki jōken
初期条件
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