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Unformatted text preview: the case we have just
studied—no external economies or diseconomies.
The long-run market supply curve (LSA) is perfectly
elastic. In this case, a permanent increase in demand
from D0 to D1 has no effect on the price in the long
run. The increase in demand brings a temporary
increase in price to PS and in the short run the quantity increases from Q0 to QS. Entry increases shortrun supply from S0 to S1, which lowers the price from
PS back to P0 and increases the quantity to Q1.
Figure 10.11(b) shows the case of external diseconomies. The long-run market supply curve (LSB)
slopes upward. A permanent increase in demand from
D0 to D1 increases the price in both the short run and
the long run. The increase in demand brings a temporary increase in price to PS and in the short run the
quantity increases from Q0 to QS. Entry increases
short-run supply from S0 to S2, which lowers the price
from PS to P2 and increases the quantity to Q2.
One source of external diseconomies is congestion.
The airline market provides a good example. With bigger airline market output, congestion at both airports S1 S0 PS Price Long-Run Changes in Price and Quantity FIGURE 10.11
Price and in the air increases, resulting in longer delays and
extra waiting time for passengers and airplanes. These
external diseconomies mean that as the output of air
transportation services increases (in the absence of
technological advances), average cost increases. As a
result, the long-run market supply curve is upward
sloping. A permanent increase in demand brings an
increase in quantity and a rise in the price. (Markets
with external diseconomies might nonetheless have a
falling price because technological advances shift the
long-run supply curve downward.)
Figure 10.11(c) shows the case of external
economies. The long-run market supply curve (LSC )
slopes downward. A permanent increase in demand
from D0 to D1 increases the price in the short run and
lowers it in the long run. Again, the increase in
demand brings a temporary increase in price to PS and
in the short run the quantity increases from Q0 to QS.
Entry increases short-run supply from S0 to S3, which
lowers the price to P3 and increases the quantity to Q3.
An example of external economies is the growth of
spet support services for a market as it expands. Price 210 6/23/11 S0 S0 S2 PS PS
LSA P0 P0 P0
P3 D1 D1 D0
0 Q0 QS 0 Q1 Q0 QS D0
0 Q2 Q0 QS Quantity
(b) Increasing-cost industry Three possible changes in price and quantity occur in the
long run. When demand increases from D0 to D1, entry
occurs and the market supply curve shifts rightward from S0
to S1. In part (a), the long-run market supply curve, LSA, is
horizontal. The quantity increases from Q0 to Q1, and the
price remains constant at P0.
animation D1 D0 Quantity
(a) Constant-cost industry LSC Q3
Quantity (c) Decreasing-cost industry In part (b), the long-run market supply curve is LSB; the price
rises to P2, and the quantity increases to Q2. This case
occurs in industries with external diseconomies. In part (c),
the long-run market supply curve is LSC; the price falls to P3,
and the quantity increases to Q3. This case occurs in a market with external economies. 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 211 C hanging Tastes and Advancing Technology As farm output increased in the nineteenth and early
twentieth centuries, the services available to farmers
expanded. New firms specialized in the development
and marketing of farm machinery and fertilizers. As a
result, average farm costs decreased. Farms enjoyed
the benefits of external economies. As a consequence,
as the demand for farm products increased, the output increased but the price fell.
Over the long term, the prices of many goods and
services have fallen, not because of external economies
but because of technological change. Let’s now study
this influence on a competitive market. Technological Change
Industries are constantly discovering lower-cost techniques of production. Most cost-saving production
techniques cannot be implemented, however, without investing in new plant and equipment. As a consequence, it takes time for a technological advance to
spread through a market. Some firms whose plants
are on the verge of being replaced will be quick to
adopt the new technology, while other firms whose
plants have recently been replaced will continue to
operate with an old technology until they can no
longer cover their average variable cost. Once average variable cost cannot be covered, a firm will scrap
even a relatively new plant (embodying an old technology) in favor of a plant with a new technology.
New technology allows firms to produce at a lower
cost. As a result, as firms adopt a new technology,
their cost curves shift downward. With lower costs,
firms are willing to supply a given quantity at a lower
price or, equivalently, they are willing to supply a
larger quantity at a given price. In other words, market supply increases, and the market supply curve
shifts rightward. With a given demand, the quantity
produced increases and the price...
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