Chapter 60, Problem 2CYU

To determine

Short-run behavior of the industry and long-run equilibrium re-establishment as demand decreases.

Explanation of Solution

  

In the above diagram, LRS is the long run supply curve which is horizontal, S1 is the short run supply curve which is upward-sloping and D1 is the initial demand curve of the egg industry. Point A is the initial equilibrium point for both long run and short run equilibrium, here equilibrium price is P and the quantity is Q. After the decrease in demand due to health concerns about cholesterol, the demand curve of egg shift to the left. As a result, the market is no longer long-run equilibrium and the short run equilibrium point shift from point A to B. In the short run, price of the goods falls which discourage firm to produce and as a result firm start reducing their output that led to decrease in supply of egg. As a result, short run supply curve shift leftward from S1 to S2 which resulted rise in price. Price increases until it reaches its initial level. As a result, egg market attains both short run and long run equilibrium point C where equilibrium output fall from Q to Q2 and price remain constant.

Economics Concept Introduction

Introduction:

Long-run equilibrium is determined by the intersection of the long-run supply curve and demand curve and short-run equilibrium is determined by the intersection of the short-run supply curve and demand curve. In the long run supply curve is horizontal where, in the short-run, the supply curve is upward-sloping. In short-run the price may change but in the long run price of the good remain, the same which means in the long run firm can sell as much as output at a constant price.