Economics - Competitive Industry

Question

What would happen in a competitive industry - at both the firm and the market level - in each of the following cases?

a. Firms in the industry are able to lower their marginal -and average- costs due to a process innovation.

b. Negative information about the product surfaces and permanently lowers consumer demand.

Both parts require industry and firm graphs comparing the before, transition, and after situations, and also a brief economic explanation. 6 graphs are needed overall.

Answer 1

Hi Alexander,

Wouldn't the next impact in part b be as follows?:  Prices are now below the minimum total cost for the firms (nothing has changed about firm cost structure), causing them to operate at a loss.  This would then cause some firms to exit, shifting the Market Supply to the left until enough firms exit so that the original price (which equals the minimum total cost for each firm) is realized.  So in the end we have both supply and demand shift to the left, new equilibrium at the original price but at a lower market quantity, and thus fewer firms in the market. 

Thoughs? Want to make sure I am not missing anything.

Answer 2

Unfortunately I can't draw these graphs out for you through text, but hopefully I can provide some guidance.

a. This would cause the supply curve in the market to shift outward (to the right), lowering equilibrium price and raising equilibrium quantity. The firms in the competitive industry would then lower their prices, since they are "price-takers" from the market. MC, ATC, and P=MR=D would all shift downward on the firm's graph.

b. Demand would shift inward (to the left) on the market graph. Shifts in consumer preferences cause movements in the demand curve. We don't move along the demand curve, but the whole curve itself moves in this case. This would lower the market equilibrium price and quantity, which would translate to the firm through a shift downward in P=MR=D.