SHORT-RUN AND LONG-RUN EQUILIBRIUM

At the’ turn of the century, Cambridge University’s great economist Alfred Marshall helped forge the supply-and-demand tools we use today. He noticed that in the short run, demand shifts produce greater price adjustments and smaller quantity adjustments than they, do in t1ie 101-6 run. We can understand this observation by distinguishing two time periods for market equilibrium that correspond to different cost categories: (1). shart-run equilibrium. when any change in output must use the same fixed amount of capital, and (2) long-run equilibrium, when capital and all other factors are variable and there is free entry and exit of firms from the industry, Let’s illustrate this distinction with an example.

Consider the market for fresh fish supplied by a local fishing fleet. Suppose the demand for fish increases; this case is shown in Figure 8-5(a) below as’ a shift from DD to IY IY. With higher prices, fishing captains will want to increase their catch. In the short run, they cannot build new boats, but they can hire extra crews and work longer hours. Increased inputs of variable factors will produce a greater quantity of fish along the short-run supply curve. shown in Figure 8.5(a). The short-run supply curve intersects the new demand curve at E’, the point of short-run equilibrium.

building and attract more sailors into the industry. Additionally, new firms may start up or enter the industry. This gives us the long-run supply curve Sf SL in Figure 8-5(b) and the long-run equilibrium at E”. The intersection of the long-run supply curve with the new demand curve yields the long-run equilibrium attained when all economic conditions (including the number of ships, shipyards, and firms) have adjusted to the new level (If demand.

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