Question

Perfect Competition (Please Graph)

1. Please explain and illustrate graphically how the diaper service market has been affected by the decrease in the North American birth rate and the development of disposable diaper.
2. Explain the long-run and the short-run effects of the event, starting from the long run equilibrium.
3. What happens to the price of diaper and the quantity of diaper in the market and a representative individual firm? (Show two diagrams for both market firms and an individual firm)

Answer 1

In the diaper service market all the firms are in longrun equilibrium with equilibrium condition where MC=MR=AC=AR. All the firms are earning normal profit. There is no tendency on the part of the firm either to into and exit from the market. Longrun equilibrium of the firms and industry. Market Firm's equilibrium MC MS ATC AR=MR M The longrun equilibrium market price is P and the market demand is M. Fach firm adjust their output at Q. The market price is equal to the lowest of the ATC. Hence each firm earning only normal profit. The low birth rate and the development of disposable diapers decrease the market demand for diaper service. Thus in shortrun the market demand curve shift to the left. This reduces the market price and the firms start to suffer loss. The price falls below the ATC. The firms incurring losses. Shortrun effect Market Firm's cquilibrium MC MS ATC AR-MR -- AR1-MR1 LOSS Loss MDI MD The fall in market price from P to Pl cause loss to the firm which is represented by the gray shaded area. The firm in shortrun continues in the market.

But in longrun some of the loss suffering firms will quit the industry and thus the industry supply decrease. The decrease in industry supply increase the price and the once again all firms starts to earn normal profit. Longrun adjustment. Market MS1 MS Firm's equilibrium MC ATC ----- --- AR IEMRI AR-MR MDI MD м. The exit of the loss suffering firms shifts the market supply curve from MS to MSI. Then the market price rise from Pl to P. Once again the firms reaches to the equilibrium where their AR=ATC. Then all firms begin to earn normal profit.