Suppose that the chicken industry is in long-run equilibrium at a price of $3 per pound of chicken and a quantity

Suppose that the chicken industry is in long-run equilibrium at a price of $3 per pound of chicken and a quantity

 

 

answer:

Demand and supply are two opposing forces in the commodity market. Cosumers creates demand for consumption. Producers supply them. Also producers may create demand for reinvestment.

These two forces depends upon price. Demand is inversly related with price. Supply has direct relation. So price is settled where the two curves will intersect.

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In this problem, demand and supply curve of chickens are available. At present 600 million pounds chckens are supplied at $3 price. There is a report of surgeon general, that chicken is good for health. So it will increase demand for chicken. It will go up at every price. So demand curve willl shift to the right. It is not possible for supply to adjust with this sudden icrease in demand. So price will rise. Firms will earn ecoomic profit. It is shown in the diagram below:

Diagram shows a shift in demand curve from D1 to D2. As a result, both price and quantity has increased.

Answer: Surgeon generals report will cause consumers to demand more chicken at every price. In the short run firm will respond by raising the price.

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In long run existing firms will increase their production to make more profit. Also new firms will be attracted in the chicken industry. So supply curve will also shift to the right. Result will be supply of more chicken at previous price level of $3 or at a little higher than it.

The diagram above shows that supply curve has shifted to S2. As a result equilibrium price has been lowered in comparison with the short run.

Answer: In the long ru, some firm will respond increasing supply until economic profit of short run is wiped off

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