Question

Drag the labels into place in the figure for a market leaving, and then returning to, equilibrium as firms exit after a decrease in demand. original short-run supply* final short-run demand* original short-run demand* long-run supply* final short-run supply* Drag each item above to its appropriate location in the image. Note that every item may not have a match, while some items may have more than one match. Price P2 +--- Q3 Q2 Q2 Market quantity (Q)

Answer 1

The final short-run supply curve shifts leftward, and the final short-run demand curve shifts downward, resulting in a new equilibrium at a lower quantity (Q2) and a lower price (P2).

Step-by-step explanation:

In the given scenario, a decrease in demand leads to a series of adjustments in the market. Initially, the original short-run demand curve reflects the market conditions.

As demand decreases, firms begin to exit the market. This exit of firms impacts the short-run supply curve. The original short-run supply curve represented the initial equilibrium.

but as firms leave due to decreased demand, the final short-run supply curve shifts to the left.

Simultaneously, the decrease in demand directly affects the short-run demand curve, causing it to shift downward. The new intersection of the final short-run supply and demand curves establishes a new equilibrium point with a lower market quantity (Q2) and a lower price (P2).

This is indicative of the market adjusting to the reduced demand by reducing both the quantity supplied and the price.

The long-run supply curve may not be explicitly involved in this particular scenario, as the adjustments primarily occur in the short run due to firms exiting the market.

Therefore, the focus is on the short-run supply and demand curves, which illustrate the transitional period following a decrease in demand and the resulting market equilibrium.

Answer 2

To analyze market equilibrium adjustments, begin with an original demand-supply diagram. After a decrease in demand, the new equilibrium will have a lower quantity and potentially a higher price. Supply shifts and firm exits lead to a new long-run supply equilibrium.

Step-by-step explanation:

Understanding Market Equilibrium Adjustments

When analyzing how a market adjusts to changes, it's important to understand the concepts of supply and demand. Initially, we draw a standard demand and supply diagram to establish the baseline market conditions with the original short-run supply (So) and original short-run demand (Do). At this point, the market is in equilibrium, where the supply curve intersects with the demand curve, indicating the equilibrium price and quantity.

If the market experiences a decrease in demand, the demand curve shifts to the left, resulting in a new equilibrium with a lower quantity and a higher price compared to the original equilibrium. As a response to the lower demand, firms may exit the market, causing a shift in the final short-run supply to the left as well. After firm exits and market adjustments, the long-term market conditions might stabilize, represented by the long-run supply (SLR), potentially returning to the final short-run demand at a new equilibrium point.

These changes are visualized by adjusting the appropriate curves on the graph and analyzing how the new equilibrium (E1) compares to the initial equilibrium (Eo). It's clear that both price and quantity differ between these two points, reflecting the overall market dynamics.