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Equilibrium - Essay Example

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A market is said to be at equilibrium when the supply of a good is equal to the demand of the good mostly attained when there is neither shortages nor surpluses in the market, thus, making prices to remain stable (Chiappori and Ekeland 2006). With the recent health reports, the…
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Extract of sample "Equilibrium"

Equilibrium A market is said to be at equilibrium when the supply of a good is equal to the demand of the good mostlyattained when there is neither shortages nor surpluses in the market, thus, making prices to remain stable (Chiappori and Ekeland 2006). With the recent health reports, the firms in the industry will maximizes its profits in the short run while they cannot make bigger profits through alteration of the prices of milk, thus, in the short run, the firm may make super-normal profits. In the short-run, the firms will not necessarily need to make profits or cover all its costs; it may only need to cover the total variable costs incurred thus the rising cost of milking equipment will not have any effect on the firms in the industry in the short run. Consequently, with marginal revenue being equal to marginal cost, super-normal profits will be realized.
In the long run, due to freedom of entry and exit from the industry, the surplus profits inform of the supernormal profits realized by the firms in the industry will attract new firms into the industry thus increasing the supply of the product (Chiappori and Ekeland 2006). Increase in supply results to fall prices as explained by the law of supply. The fall in prices results to the individual firms facing a falling perfectly elastic demand curve consequently resulting to a reduction of the surplus profits. This will continue to the point where the firms will no longer be making surplus profits, realized when the firm is just covering its production costs as a result of the increase in the cost of milking equipments. During this time, no more firms will be attracted to the industry when the price is equal to the average cost while the demand curve is a tangent to the average cost curve at the minimum point, a point when the firm is making normal profits.
Works Cited
P.A. Chiappori, I. Ekeland, The micro economics of group behavior: General
Characterization, Journal of Economic Theory, Volume 130, Issue 1, September 2006, Pages 1-26. Read More
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