Question

Suppose the demand for car washes in Collegetown falls as a result of a cutback in college enrollment. Show graphically how the price and output for the market and for a single firm will be affected in the short run and in the long run.

Assume the market is perfectly competitive and that it is initially in long-run equilibrium at a price of $12 per car wash. Assume also that input prices don’t change as the market responds to the change in demand.

Answer 1

The decrease in car wash demand due to lower college enrollment in Collegetown leads to a shift in the demand curve leftward, resulting in a lower market price and firm output in the short run. In the long run, some firms exit the market causing the supply curve to shift, and the remaining firms return to a state of zero economic profit at a new equilibrium price and quantity.

Step-by-step explanation:

When the demand for car washes decreases due to a fall in college enrollment in Collegetown, we can anticipate certain changes in both the short run and the long run for a perfectly competitive market, initially in long-run equilibrium with a car wash price of $12. Here's how we illustrate the changes:

Short Run

• Demand curve shifts to the left due to lower demand.
• Market price decreases to clear the excess supply.
• Individual firms experience a decrease in price, leading to a lower output where new P = MR = MC.
• Some firms may incur losses if price falls below average variable cost.

Long Run

• Some firms exit the market as they incur sustained losses.
• Market supply curve shifts left until remaining firms can make normal profits (zero economic profit).
• Market price stabilizes at a new equilibrium where P = MR = MC = AC for the remaining firms.

Graphically, this means that the original demand curve D1 shifts to D2 in both market and firm diagrams, leading to a lower equilibrium price and quantity in the short run. In the long run, the supply curve will also shift, and the market and firms adjust back to a new long-run equilibrium where firms are making zero economic profit.