The new equilibrium price may remain above the original level, or it may return to the original level, depending on the size of the shift in the market supply, which reflects the cost conditions of the industry (the change in factor prices as the industry expands).Īn industry is a constant-cost industry if the prices of factors of production employed by it remain constant as industry output expands. This influx of firms will shift the market supply to the right and will cause price to fall below the short-run equilibrium level (P). In the long run the excess profits made by the established firms will attract new firms into the industry. Price will rise (to P’ in figure 5.18) and the quantity supplied will increase (from Q to Q’ in figure 5.18) by an expansion of the production of the existing firms (from X to X’ in figure 5.19), which will be realizing excess profits at the higher market price (equal to the area ABCP’). In the short run the supply curve is given. Assume that the market demand shifts to the right due to an increase in consumers’ income (or to a change in the other determinants of market demand, e.g.
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