industry output has increased to 240,000 units. The higher level of output
is supplied by the 40 incumbent firms, each having increased its production
to 6,000 units. (According to Figure 7.3a, this is precisely the firm’s profit-
maximizing response to the $8 price.) The equilibrium at Eis determined
by the intersection of the new demand curve and the total supply curve of
the 40 firms currently in the industry. This supply curve also is shown in
Figure 7.4 and is constructed by summing horizontally the individual firms’
supply curves (i.e., marginal cost curves) in Figure 7.3. (Check Station 4 will
ask you to derive the market equilibrium by equating demand and short-
run supply.)
The shift in demand calls forth an immediate supply response (and a
move from E to E). But this is not the end of the story. Because the firms cur-
rently in the market are enjoying excess profits, new firms will be attracted
into the industry. Price will be bid down below $8 and will continue to be bid
down as long as excess profits exist. In Figure 7.4, the new long-run equilib-
rium result is at E*. Price is bid down to $6 per unit, its original level. At this
price, total market demand is 280,000 units, a 40 percent increase above the
200,000 units sold at equilibrium E. In turn, industry supply increases to match
this higher level of demand. How is this output supplied? With the price at $6
once again, each firm produces 5,000 units. Therefore, the total output of
280,000 units is supplied by 280,000/5,000 56 firms; that is, 16 new firms
enter the industry (in addition to the original 40 firms). In the long run, the
40 percent increase in demand has called forth a 40 percent increase in the
number of firms. There is no change in the industry’s unit cost or price; both
remain at $6 per unit.294 Chapter 7 Perfect CompetitionCHECK
STATION 4Starting from the long-run equilibrium in Check Station 3, suppose market demand
increases to QD 400 20P. Find the equilibrium price in the short run (before new
firms enter). (Hint:Set the new demand curve equal to the supply curve derived in Check
Station 2.) Check that the typical firm makes a positive economic profit. In the long run—
after entry—what is the equilibrium price? How many firms will serve the market?LONG-RUN MARKET SUPPLY The horizontal line in Figure 7.4 represents the
case of a constant-costindustry. For such an industry, the long-run market sup-
ply curve is a horizontal line at a level equal to the minimum LAC of produc-
tion. Recall that any long-run additions to supply are furnished by the entry of
new firms. Furthermore, in a constant-cost industry, the inputs needed to pro-
duce the increased industry output can be obtained without bidding up their
prices. This is the case if the industry in question draws its resources from large,
well-developed input markets. (If the industry is a “small player” in these input
markets, an increase in its demand will have a negligible effect on the inputs’
market prices.) For instance, the market for new housing exhibits a nearly hor-
izontal long-run supply curve. In the long run, the industry’s two main inputs—c07PerfectCompetition.qxd 9/29/11 1:30 PM Page 294