5. Short-run supply and long-run equilibrium Consider the competitive market for

Question

5. Short-run supply and long-run equilibrium Consider the competitive market for steel. Assume that, regardless of how many firms are in the industry, every firm in the industry is identical and faces the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves shown on the following graph. 100 90 80 70 60 50 30 20 10 0 0 20 30 40 50 60 70 80 90100 The following diagram shows the market demand Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where there is no output, since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 15 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 20 firms.

Explanation / Answer

If there are 10 firms in the market, the short run equilibrium price of steel would be $15 per ton. At that price, firms in this industry would face excess demand. Therefore, in the long run, firms would expand production in the steel market.

because competitive firms earn zero economic profits at the long run and equilibrium price must equal long-run average cost per ton i.e. $30 per ton. From the graph, it means there will be 20 firms operating in the long run.

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