Question

Suppose a perfectly competitive, increasing-cost industry is initially in long-run equilibrium and demand suddenly increases. Explain how the demand change affects price and quantity and who benefits from the increased demand.

Answer 1

With an increase in the demand, there will be an upward pressure on the price i.e. with a higher demand the price will also increase. At a higher price, the firms in the market can increase the production and supply more goods. A firm generally operates with an upward sloping Marginal cost that means with more supply the cost of the firm increases.

So with an increased demand, the firm will produce more and increase the price of the goods. At a higher price, the profit of the firm will also rise. The benefit will go to the firm in the form of higher profit.