Question

Suppose the market for paper clips is perfectly competitive The rise of digital files over paper files shifts the demand curve for paper clips inward Fill in the following with M - more greater L = loss/lower S = the same EP = economic profits EL = economic losses Z = zero economic profit In the short run (right after the shock), the typical firm produces_____ output and (profit-wise) makes____ market output is _____than before the demand shock. In the new long run equilibrium, the typical form produces____ than right AFTER the shock and (profit-wise) makes____ Total market output is____ than tight AFTER the shock

Answer 1

In response to a decrease in demand for paper clips, firms in a perfectly competitive market produce less in the short run, incurring economic losses, but in the long run, market adjustments lead firms to produce more than immediately after the shock, earning zero economic profit and stabilizing market output.

Step-by-step explanation:

In the context of a perfectly competitive market for paper clips, wherein digital files have reduced demand for paper clips, we can analyze the market's response in both the short run and the long run.

Initially, as the demand curve shifts inward, the typical firm will produce less output and make economic losses; market output is lower than before the demand shock. However, as loss-making firms exit the market, the market supply will decrease, leading to a rise in market price.

Eventually, in the new long-run equilibrium, the remaining firms will produce more than they did right after the shock, earn zero economic profit, and the total market output will stabilize at a level where economic profits are neutralized.