Answer to Question #112128 in Economics for Ivan Low

Question

Assume the market for the wheat display’s the following characteristics, namely many buyers and sellers, produce identical products and have no barriers to entry or exit.

(a) Assume the wheat industry starts out in the long-run competitive equilibrium. Using appropriate diagrams shows how this would look at both the industry and firm level. (Hint: Each firm is making a normal profit).

(b) Now assume there has been a permanent decrease in demand for wheat. Using appropriate diagrams explain what will happen to price and quantity for wheat at both the industry and firm level.
(Hint: You need to discuss what type of profits, if any, each firm is making).

(c) With the use of appropriate diagrams, discuss the adjustment process, at both industry and firm level, to bring the market for wheat back to long-run equilibrium.

Answer 1

(a) At the industry level demand curve intersects supply curve in the equilibrium point, and at the firm level each firm is making a normal profit, so P = MR = MC = LATC.

(b) If there has been a permanent decrease in demand for wheat, then both the equilibrium price and quantity for wheat would decrease, because firms would face losses and some of them would shut down.

(c) As some firms exit the market, the supply would decrease, as a result the price would increase until in long-run equilibrium all remaining firms receive normal profits.