Suppose that a competitive market is initially in long-run equilibrium. Which of the following are the most likely results of an increase in market demand?
A)Existing firms will produce less and some firms will exit the market so that the market supply curve will shift to the left.
B)Some existing firms will produce more while some other firms will exit the market so that the market supply curve will remain the same.
C)Existing firms will produce more and new firms will enter the market so that the market supply curve will shift to the right.
D)Existing firms will produce less while new firms will enter the market so that the effect on the market supply curve is uncertain.
E)Nothing will change in the market.

Question

Quizplus · Accepted Answer

An increase in market demand will lead to higher profits for firms, which will attract new firms to enter the market. Existing firms will also increase their production in order to take advantage of the higher prices. Both of these factors will shift the market supply curve to the right, resulting in a new long-run equilibrium with a higher quantity and price. Option A is incorrect because firms would not produce less if demand increases. Option B is incorrect because some firms would exit while others would increase production in response to the increase in demand. Option D is incorrect because it doesn't take into account the profit motive of firms to enter and exit the market. Option E is also incorrect because an increase in demand would lead to changes in the market equilibrium.

Suppose That a Competitive Market Is Initially in Long-Run Equilibrium