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If you're seeing this message, it means we're having trouble loading external resources on our website. If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. Suppose there is an increase in demand for a particular good, X. Show graphically and explain the response of a perfectly competitive firm in the short run to this change in demand. Show graphically and explain the long-run response by representative firm to this increase in demand. The increase in demand creates a condition of excess demand at the current price of P1. The excess demand allows an increase in price to the market clearing level of P2. The firm reacts in the short-run to the increase in price by increasing its profit maximizing output from q1 to q2. The increased supply by existing firms in shown in the market diagram as an increase in output from Q1 to Q2. At P2 with output q2, the typical firm earns positive economic profit (the shaded area in the firm diagram). In the long-run, the positive profit attracts entry and additional supply (shown in the market diagram as a rightward shift in supply, S1 to S2). The added supply pushes price down until the typical firm earns zero profits. The firm reacts to the falling price by reducing its output from q2 to q1. Long-run equilibrium is restored in the market at a price of P1 and output Q3. In the long-run, the initial price is restored because the increase in demand is assumed to occur in a constant-cost industry. If the industry was characterized by increasing cost, the long-run equilibrium price would exceed the initial price, and if the industry was characterized by decreasing cost, the long-run equilibrium price would be less than the initial price. The output of the typical firm is the same as before the increase in demand, q1, but total output is larger reflecting the larger number of firms in the industry. What happens in the long run and short run in a perfectly competitive market?In a perfectly competitive market, firms can only experience profits or losses in the short run. In the long run, profits and losses are eliminated because an infinite number of firms are producing infinitely divisible, homogeneous products.
How can a perfectly competitive firm increase its output in the short run?Short‐run profit maximization.
A firm maximizes its profits by choosing to supply the level of output where its marginal revenue equals its marginal cost. When marginal revenue exceeds marginal cost, the firm can earn greater profits by increasing its output.
What is the perfect competition supply curve in the short run?A Firm's Short-Run Supply Curve in a Perfectly Competitive Market. The supply curve (from Chapter 2) shows the quantity supplied at each price. Individual firms will choose to produce where price equals marginal cost; the short-run supply curve is equal to the short-run marginal cost curve.
How does perfect competition affect supply and demand?The most fundamental is perfect competition, in which there are large numbers of identical suppliers and demanders of the same product, buyer and sellers can find one another at no cost, and no barriers prevent new suppliers from entering the market. In perfect competition, no one has the ability to affect prices.
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