Suppose the market for physicians was perfectly competitive (though we know it i

Question

Suppose the market for physicians was perfectly competitive (though we know it is not) and was represented by this graph and is currently operating at price of $80 for a visit. Answer the following questions.

The market is currently:

Experiencing a surplus

(Continued from above) What will happen to the market?

There will be a decrease in demand

(continued from above)
The new market price would then be:

$200

(Continued from above)

Suppose a new, more efficient medical record system becomes available which lowers the marginal cost of a visit by $20. What would happen to the market in the long run?

(continued from above)

The new market price (after the new medical record system) would then be:

Explanation / Answer

Suppose the market for physicians was perfectly competitive (though we know it is not) and was represented by this graph and is currently operating at price of $80 for a visit. The market is currently experiencing a shortage. The demand is greater than supply.

Experiencing a surplus Suppliers will increase their price and quantity supplied

There will be a decrease in demand The new market price would then be $100 (interaction of demand and supply curves)

If a new, more efficient medical record system becomes available which lowers the marginal cost of a visit by $20. There will be an increase in supply, this would lower the price by $20. This is because there will be an increase in profits in short run and there will be entry of new firms and hence greater supply.

The new market price (after the new medical record system) would then be $80.

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