Refer to Figure 1414 Assume that the market starts in equili

Refer to Figure 14-14. Assume that the market starts in equilibrium at point W in panel (b) and that panel (a) illustrates the cost curves facing individual firms. Suppose that demand increases from D0 to D1. Which of the following statements is not correct?

Solution

a. W is not the longrun equilibrium. It is actually shortrun equilibrium of the market. Here the shortrun demand curve D₀ intersects the shorrtun supply curve S₀ at point W and the price is P₂.

b. Points W,Y and X are shortrun equilibrium. Suppose the market is start from the equilibrium at W with P₂ price, here the shortrum supply curve S₀ intersects the shortrun demand curve D₀. In shortrun while the supply remaining the same and an increase in demand from D₀ to D₁ raise the price to P3. Again while the demand remaining the same with D₀ demand curve an increase in supply from S₀ to S₁ reduce the price level to P₁.

c. Point Y is the shortrun equilibrium where the shortrun demand increase without a corresponding increase in supply.

d. Point Z is the longrun equilibrium where the longrun demand curve D₁ intersects the longrun supply curve S₁ at point Z.