Economic losses cause firms to leave and cause

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Unformatted text preview: ncing A permanent decrease in demand changes the long-run equilibrium: – in the short run: price falls; quantity supplied decreases; firms incur economic loss… – in the long run: firms exit, price rises to original level; remaining firms earn zero economic profits, but fewer firms in industry. A Decrease in Demand Industry Price and Cost Price S1 Firm S0 P0 ATC MR0 P0 P1 MC P1 MR1 D0 D1 0 Q2 Q1 Q0 Quantity q1 q0 Quantity External Economies and Diseconomies and External economies are factors beyond the control of an individual firm that lower its costs as the industry output increases. External diseconomies are factors outside the control of a firm that raise the firm’s costs as industry output increases. Technological Change Technological Implementing new cost-saving production techniques generally requires firms to invest in new plant and equipment. This takes time. The cost curves of firms adopting the new technology shift downward. The industry supply curve shifts rightward; quantity increases and price falls. Firms adopting the new technology make an economic profit. This draws in new technology firms; old technology firms exit. Eventually reach a new long-run equilibrium: zero economic profit. Price Efficiency of Competition Efficiency S B0 P Consumer surplus Efficient allocation * C0 Producer surplus D Q0 Q* Quantity Efficiency of Perfect Competition Competition There are three main obstacles to efficiency: – Monopoly – Public goods – External costs and external benefits...
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