Suppose a competitive industry is in long-run equilibrium. When demand increases, market price
A)decreases in the short and long run.
B)rises in the short run and falls in the long run.
C)decreases in the short run and rises in the long run.
D)rises in the short and long run.
E)rises in the short run and rises more in the long run.

Question

Quizplus · Accepted Answer

In a competitive industry, an increase in demand initially raises prices due to the immediate increase in demand relative to supply. Over time, the higher prices attract more firms into the market or encourage existing firms to expand production, which increases supply. As supply increases to meet the new level of demand, prices fall back towards the original equilibrium, stabilizing in the long run at a level that may be higher or lower than the original price, depending on cost conditions, but typically not as high as the initial short-run increase.

Suppose a Competitive Industry Is in Long-Run Equilibrium