Question

2 0) Draw and label a supply and demand diagram with a short run supply curve. (ii) Shift out the demand curve and show the short run effect on output and price. (iii) Show the long run effect on price by drawing a second short run supply curve. Use this short run supply curve to trace out the position of the long run supply curve. Do (). (ii) and a. a constant cost industry and b. an increasing cost industry Fully explain your diagrams. c. Explain intuitively why the long-run price elasticity of supply is greater than the short-run elasticity (i) for

Answer 1

Constant cost Industry Since this is a constant cost industry, thus position of cost curves will not change. Increase in demand will attract other firms in industry and this will increase supply to SRS' and price will return to p_0 and LRS is the long run supply curve of industry (b) Increasing cost Industry Increase in demand will increases price and new output OM_1 will be produced. Demand for factors increases as new firms inter and thus cost curves shift upwards and supply curve to right SRS_2. LRS is (c) log run price elasticity is larger than short run elasticity because costly factors of productions can be substituted with cheap factors.