Figure 14-9
-Refer to Figure 14-9.Assume that the market starts in equilibrium at point A in panel (b)and that panel (a)illustrates the cost curves facing individual firms.Suppose that demand increases from D0 to D1.Which of the following statements is correct?

Question

Figure 14-9  
-Refer to Figure 14-9.Assume that the market starts in equilibrium at point A in panel (b)and that panel (a)illustrates the cost curves facing individual firms.Suppose that demand increases from D0 to D1.Which of the following statements is correct?

Quizplus · Accepted Answer

When demand increases from D0 to D1, the market moves from point A to point C in panel (b). In the short run, individual firms respond to this increase in demand by increasing production, leading to a rise in price and profit. Thus, points A, B, and C are all possible short-run equilibria. However, in the long run, new firms enter the market due to the increase in profit, increasing the market supply and pushing down the price until it reaches the minimum of the long-run average cost curve (LRAC) at point C. Therefore, point C represents the long-run equilibrium point. Point A is not a long-run equilibrium point because at that point, price is above the LRAC and firms are making positive economic profit, which attracts new firms to enter until the price falls to the LRAC at point C. Hence, D is the correct option.