Assume the market for a good produced by perfectly competitive firms is currently in equilibrium (economic profit = 0). Now assume there is a decrease in market demand for the good
Analyze the short-run effects of the decrease in demand on equilibrium market price and output. What has happened to the profits of each of the firms in the industry? Over time, what will happen to the number of firms in the industry? Why?
In the short run, the decrease in market demand, which is illustrated graphically by a leftward shift of the market demand curve, will cause market price and output to decrease. This will result in losses for existing firms, since price will fall below the average total costs of production. Over time, some of the firms in the industry will leave, causing market supply to decrease (shift left) and market price to rise until the remaining firms are once again earning zero economic profit and there is no more incentive for firms to exit the market.
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What will be an ideal response?
A firm advertising using an expensive, famous spokesperson is often
A) aimed to raise rivals' costs. B) used to increase the total market demand. C) used to steal customers from rivals. D) used to focus on general problems the product addresses.
An increase in the money supply shifts the aggregate-supply curve to the right
a. True b. False Indicate whether the statement is true or false
The StolperSamuelson theorem suggests that, over time, free international trade should lead to:
a. equalization of real wages across the world. b. greater divergences in real wages across the world. c. equalization of prices across the world. d. greater divergences in prices across the world.