#23.4 -- Differences in Industries (4.36)

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Chapter 23 -- Perfect Competition

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Video #23.4 – Differences in Industries

Chapter Learning Outcomes:

Chapter Learning Outcomes Graphically represent how equilibrium changes in the short run and long run when there is a change in demand for the following three industries: a constant cost industry, an increasing cost industry, and a decreasing cost industry.

Long-Run (Industry) Supply (LRS) Curve:

Long-Run (Industry) Supply (LRS) Curve Graphic representation of the quantities of output that the industry is prepared to supply at different prices after the entry and exit of firms are completed.

Constant-Cost Industry:

Constant-Cost Industry Costs remain constant as output increases or decreases.

Constant-Cost Industry:

Constant-Cost Industry Industry begins at long-run competitive equilibrium at Point 1. Demand increases to Point 2. Price rises P 2 , and there are positive economic profits. Consequently, existing firms increase output & new firms enter the industry, increasing costs to Point 3. Input costs remain constant as output increases. Profits fall to zero through a decline in price.

Increasing-Cost Industry:

Increasing-Cost Industry Costs increase as output increases. Costs decreases as output decreases.

Increasing-Cost Industry:

Increasing-Cost Industry Industry begins at long-run competitive equilibrium at Point 1. Demand increases to Point 2. Price rises to P 2 . There are positive economic profits. Consequently, existing firms increase output and new firms enter the industry to Point 3. Input costs increase as output increases. Profits decline by a combination of rising costs and falling prices. The new equilibrium price (P 3 ) for an increasing- cost industry is higher than the initial equilibrium price (P 1 ).

Decreasing-Cost Industry:

Decreasing-Cost Industry Costs decrease as output increases. Costs increase as output decreases.

Decreasing-Cost Industry:

Decreasing-Cost Industry Industry begins at long-run competitive equilibrium at Point 1. Demand increases to Point 2. Price rises to P 2 , and there are positive economic profits. Consequently, existing firms increase output and new firms enter the industry to Point 3. Input costs decrease as output increases. New equilibrium price (P 3 ) for a decreasing-cost industry is lower than old equilibrium price (P 1 ).

Chapter Learning Outcomes:

Chapter Learning Outcomes Graphically represent how equilibrium changes in the short run and long run when there is a change in demand for the following three industries: a constant cost industry, an increasing cost industry, and a decreasing cost industry.

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