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Micro Economics

Notes Market Response to a Technological Improvement

Figure 10.11

P P
MC 0
AC 0
0
S (Short run)
MC 1
AC 1 S (Short run)
1
A
A
0 P 0 S (Long run)
P
0
B
B
P 1 P 1
C
1
P 2 P 2 S (Long run)
C
D 0
Q Q
0 0
0
1
Q Q Q 2
(a) Firm (b) Market
A technological improvement will shift AC and MC curves down, creating short run profi ts. As

existing firms expand output and as new firms enter, these profits will be competed away until

the price has once again fallen to equal average total costs (initially point B in the short run) and
ultimately point C in the long run (Figure 10.11).
Market with Specialised Inputs Response to a Decrease in Demand

Faced with a decrease in demand which it sees as fall in price and hence profit, a competitive

firm will respond by decreasing output in order to minimise losses. Firm output and market

output will fall. Figure 10.12 is the market response: as all firms decrease output, the demand

for specialised inputs will fall, causing the firm’s cost in (a) to fall from AC to AC . The long run
1
0
equilibrium price will be lower than the original price, and the long run supply curve S will be
LR
upward sloping, rather than perfectly elastic.
Figure 10.12
P P
MC 0
MC 1
S SR
AC 0
AC 1 S LR
A
A
P 0 P 0
C
1 1
P P
C
2 2
P P B
B
D 0
D 1
Q Q
0 0
(a) Firm (b) Market

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