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Perfect Competition Short and Long Run Equilibria

A crucial dimension of a perfectly competitive market is ease of entry if firms in the industry are making profits i.e. if the market price exceeds their average cost other firms will begin to enter the industry.

The graph below describes the market for chickens. The initial equilibrium is disrupted when an article appears in a prestigious medical journal reporting that eating chickens twice a day both prevents baldness and causes currently bald people to regain their hair.

Use the graph below to trace the development of the market as the article first causes demand and profits to increase and then causes additional firms to enter the market.

Question: Explain how, in the long run, the market for chickens has undergone a significant increase in demand and output but no increase in the long run price.


Created by Frank Levy and Myounggu Kang
Last Updated on September 26, 2003