Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 8] PRICE AND OUTPUT UNDER PERFECT COMPETITION 209
(d ) Figure 8-21 is similar to those in Problem 8.20(c) and Problem 8.21(d) but reflects the changes introduced in
this problem. (The student should compare these three figures.)
Fig. 8-21
8.23 With reference to Fig. 8-22, (a) explain the sequence of events leading from equilibrium points 1 and E
to equilibrium points 2 and C for the perfectly competitive industry and firm and (b) explain how the
perfectly competitive industry and firm go from equilibrium points 2 and C to equilibrium points 3
and E 0 .(c) Why does the whole set of the perfectly competitive firm’s cost curves shift straight
down in Fig. 8-22 and straight up in Fig. 8-9, while it shifts down and to the right in the figure in
Problem 8.22(d) and up and to the left in the figure in Problem 8.21(d)? What implicit assumption
with regard to the change in factor prices is involved in each case?
Fig. 8-22
(a)
(b)
(c)
In Fig. 8-22, the perfectly competitive industry and firm are originally in long-run equilibrium at points 1 and
E, respectively. If now the short-run market demand curve shifts from D to D 0 , the new equilibrium price
becomes $16 (point 2) and each established firm will expand output to point C and make CF profits per
unit (so far, this is identical with Examples 11 and 13).
Since established firms are making short-run profits, more firms enter this perfectly competitive industry in the
long run. The short-run industry supply curve shifts from S to S 0 , giving the new equilibrium price of $4 (point 3)
at which all firms just break even (point E 0 ). Joining market equilibrium points 1 and 3, we get the negatively
sloped LS curve for this decreasing cost industry. The firm’s entire set of cost curves shifted down (from LAC,
SAC, and SMC to LAC 0 ,SAC 0 , and SMC 0 ) because factor prices fell as more firms entered the industry (attracted
by the profits) and the industry output expanded. If all firms in this industry are identical in size, there will be 225
firms, each producing 400 units of the new equilibrium output of 90,000 units for the industry.
Since the firm’s entire set of cost curves has shifted straight down in panel A of Fig. 8-22 and straight up in
panel A of Fig. 8-9, we have implicitly assumed that all factor prices changed (increased in Fig. 8-9 and
decreased here) by the same proportion. In Fig. 8-20, on the other hand, the firm’s LAC curve shifted not
only up but also to the left. This means that the price of fixed factors increased relative to the price of variable
factors, the firm economized on its use of fixed factors and built a smaller optimum scale of plant than before.
In Fig. 8-21, the opposite occurred (from what happened in Fig. 8-20) and for the opposite reason.