Econ501aL15 - What Happens when the Environment Changes:...

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What Happens when the Environment Changes: Comparative Statics Analysis Consider the market for gas powered chainsaws, originally in long run and short run equilibrium at p x =16 and X d =32 . 0 5 10 15 20 25 30 35 $/x 2468 1 0 x Firm’s Supply Curve 0 5 10 15 20 25 30 35 px 10 20 30 40 X Market Supply Curve
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Now suppose a hurricane strikes, increasing the demand for gas powered chainsaws. Suppose also that f rms’ short run marginal costs are unchanged. (In the very short run aftermath, it may be very costly to access this market, so the supply curve might shift up, and things might be even worse.) 0 5 10 15 20 25 30 35 $/x 2468 1 0 x Firm’s Supply Curve 0 5 10 15 20 25 30 35 px 10 20 30 40 50 X Market Supply Curve
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In the short run, the price increases from 16 to 20, and the quantity increases from 32 to 40. The price increases for chainsaws already in inventory. No one has any market power, so this is not gouging! Firms receive economic pro f ts. We are not in long run equilibrium any more. As entry becomes possible, new f rms will enter the mar- ket, and the price will fall to 16. Think of an immediate
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This note was uploaded on 07/17/2008 for the course ECON 501.02 taught by Professor Yang during the Spring '08 term at Ohio State.

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Econ501aL15 - What Happens when the Environment Changes:...

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