Suppose that a perfectly competitive industry is in long-run equilibri

Suppose that a perfectly competitive industry is in long-run equilibrium, and demand increases. Explain the short- and long-run effects on the firm and the industry.

What will be an ideal response?

ANSWER

Short run: An increase in demand raises equilibrium price and quantity. Existing firms produce more (because the higher price means that MR=MC at a higher quantity) and earn positive economic profits.

Long run: Positive profits attract new firms into the industry. The increase in supply reduces price and further increases quantity. Firms continue to enter until economic profits return to zero, and there is no further incentive for entry.