Question

explain the process by which the market would arrive at the price you indicated in the previous questions pertaining to the chart of market equilibrium. would you expect output in the long run to be more than 700000 units in the market? how much would you expect each firm in the market to be producing in the long run?

Answer 1

At equilibrium, the price is 10 and the quantity is 700,000 units. We can now see that at this price the company is making supernormal profits because AC(8) < AR (10).

Elaborating the process:

Equilibrium price and quantity are determined at the point where the supply and demand curves intersect.

Now, in the long run, attracted by this profit, a new firm will enter the industry and the supply curve will shift to the right. This will cause the price level to fall and industry output to increase. At the new equilibrium, the price will be 6.2 when the entire firm will earn a normal profit because AC = AR and produce 14 units of output.

As the number of firms increases, output will increase beyond 700,000 Although individual firm output will decrease, the entry of new firms will increase supply more than decrease.

What's equilibrium price?

The equilibrium price, also known as the market clearing price, is the cost to consumers that is fixed for a product or service so that supply and demand are equal or roughly equal. Manufacturers or sellers can sell all the units they want to move, and customers can access all the units they want to buy.

Learn more about equilibrium price:

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