Figure 13-14
-Refer to Figure 13-14.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 13-14  
-Refer to Figure 13-14.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

- Point A represents the initial equilibrium.
- When demand increases to D1, price and quantity both increase in the short run causing a movement from point A to point C.
- In the long run, new firms enter the market causing the supply to increase and shift to the right. This results in a movement from point C to point B which represents the new long-run equilibrium.
- Point C is a short-run equilibrium, but not a long-run equilibrium as firms are making economic profit in the short run, which incentivises entry into the market and shifts supply to the right in the long run.