ECO-4 Lecture Notes - Lecture 23: Economic Equilibrium, Longrun, Natural Monopoly
Introductory Economics
Notes
Joseph Yang
CHANGING TASTES & ADVANCING TECHNOLOGY
A PERMANENT CHANGE IN DEMAND
○ Demand decreases = market price & quantity decrease = company price/marginal
revenue will decrease (horizontal line shift down vertically)
○ MARKET IS NOW @ SHORT-RUN EQUILIBRIUM BUT NOT LONG-RUN
■ Short run because each firm is maximizing profit
■ Not in long run because each firm is incurring an economic loss ATC > P
○ Economic loss = signal for firms to exit the market
■ Therefore economic loss = market exit = market supply curve gradually shifts
leftward
● When market supply decreases, price rises
● @ each higher price, firm’s profit maximizing output = greater =
firms increases their output as prices rises
● Each firm moves up along marginal cost/supply curve b/when firms
exit market, market output decreases but output of firms that remain in
market increase
● Eventually, the price will go back to original
○ Market quantity will decrease
○ Back to original/normal for company
● MARKET = NOW IN LONG-RUN EQUILIBRIUM
○ Difference between initial long-run equilibrium & the final long-run equilibrium = #
of firms in the market
■ Permanent decrease in demand = decreased number of firms
■ Each firm remaining in market produces same output in new long-run
equilibrium as it did initially makes zero economic profit
■ In process of moving from initial equilibrium to new one, firms incur
economic losses
○ Permanent increase in demand = similar effect
■ = higher price, economic profit & entry
■ Entry increases market supply & eventually lowers price to original level &
economic profit to zero
■ =increase in quantity
○ It is the process, not the equilibrium that describes the real world
*** IN LONG RUN, REGARDLESS OF DEMAND +/-, PRICE CAN GO +/-/=
EXTERNAL ECONOMIES & DISECONOMIES
Document Summary
Demand decreases = market price & quantity decrease = company price/marginal revenue will decrease (horizontal line shift down vertically) Market is now @ short-run equilibrium but not long-run. Economic loss = signal for firms to exit the market. Short run because each firm is maximizing profit. Not in long run because each firm is incurring an economic loss atc > p. Therefore economic loss = market exit = market supply curve gradually shifts leftward. @ each higher price, firm"s profit maximizing output = greater = firms increases their output as prices rises. Each firm moves up along marginal cost/supply curve b/when firms exit market, market output decreases but output of firms that remain in market increase. Eventually, the price will go back to original. Difference between initial long-run equilibrium & the final long-run equilibrium = # of firms in the market. Permanent decrease in demand = decreased number of firms.
