ThinkEconomics: Market Equilibrium in the Long Run

		In an Increasing Cost Industry, an increase in input demand by firms in the industry causes an increase in input prices and thereby an increase in average production costs. Also, at a LR equilibrium, profits of all firms in the industry are zero and so no firms are entering or exiting the market.

		Assume that initially, the market or industry is in SR and LR equilibrium at (Q₁,P₁). Suppose demand increases from D₁ to D₂. If (P_SR,Q_SR) denotes the SR market equilibrium price and quantity and (Q_LR,P_LR) denotes the LR market equilibrium price and quantity, then P_SR* > P_LR* > P₁* and Q_LR* > Q_SR* > Q₁*.


		For a decrease in demand, the adjustment process works in a similar fashion but changes occur in the other direction. E.g., a decrease in demand creates a surplus, which then decreases the equilibrium price and quantity in the short run. Negative SR profits induce firms to *leave*and profits eventually return to zero. Work through this case on your own.

Introduction	Market Equilibrium in the Long Run
Changes in Supply, Demand and Market Equilibrium	The Aggregate Demand and Aggregate Supply Model
A Firm's Long Run Average Cost Curve	Macroeconomic Phenomena in the AD/AS Model
Profit Maximization for a Competitive Firm	Economic Policy Tools