Question

Q7. A competitive industry is in long-run competitive equilibrium when the price of a complement good (in consumption) decreases.

What will happen in the short run to:

a) The market demand curve?

b) The market supply curve?

c) Market price?

d) Market output?

e) The firm’s output?

f) The firm’s profit?

b. What will happen in the long run to the firm and the industry?

Q8. The supply curve for an industry shows the relation between supply price and industry output.

a) The long-run competitive supply price rises as industry output increases in a(n) ___- cost industry. Explain what causes supply price to increase.

b) Describe the long-run competitive supply curve for a constant-cost industry. Explain what happens to long-run supply price as industry output increases.

Answer 1

Statement: Price of complement good decreases

i.e demand for complement good will increase

A) Market demand curve for the good will shift to the right i..e more will be demanded since both the goods are complements. For example, if bread and butter are taken together then a decrease in price of bread will increase consumption/demand for both.

B) Market supply curve will shift to the left. As stated in a) since price has decreased, suppliers will get lower revenue and hence supply less and since both the goods are complements, supply of both will fall

C) In the short run the price mechanism is not so flexible, it takes supply and demand to adjust. Price of the good will decrease.

D) In the short run market output will fall since suppliers are getting a lower price and thus will supply less of the good. It can also be the case that market output takes sometime to adjust hence in really short run it will not change much.

E) The firm's output will also fall.

F) The firm's profit will fall since revenue has fallen(due to lower price).

Q8) a) increasing cost industry

change in cost of production(upward), change in number of producers, increase in price of factors of production

b) The supply curve is a horizontal line in the long run for a constant cost industry. This means that the price will remain the same for whatever value of output supplied. As industry output increases, each firms thus contributes a smaller share to the total output hence price will fall to be competitive in the market until economic profits are zero i.e. price equals marginal cost