Question

Begin again with the initial equilibrium. Assume now that a natural disaster destroys a factory where this product is produced. Will the immediate impact be on the demand curve or on the supply curve? Which way will the curve shift (left or right)? Will the new equilibrium price be (higher or lower)? Will the new equilibrium quantity be (higher or lower)? Consider again the situation in part c in which a natural disaster occurs. If this is a competitive market, what will happen to equilibrium quantity in the LONG run? To equilibrium price in the LONG run? In the LONG run the

Answer 1

We start with the initial equilibrium where demand equals supply to determine the quantity demanded and quantity supplied and the equilibrium price.

There is a natural disaster which destroys a factory. Because this is expected to reduce the production of the good, we expect that there will be an immediate impact be on the supply curve. This supply curve will shift to the left showing this reduced production. The new equilibrium price be higher and the new equilibrium quantity be lower than the original one.

Now we assume that the market for this product is a competitive market. Because a factory has closed and production is reduced. due to a natural disaster, we expect price to higher, leaving firms with economic profit. Hence, this will encourage many firms to enter the market in the long run and so there will be an increase in the supply in the long run. Hence the equilibrium quantity in the LONG run will increase and reach to its original level while the equilibrium price in the LONG run will fall.