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Analyze the effects of entry of a new firm. More precisely imagine there are I consumers...

Analyze the effects of entry of a new firm. More precisely imagine there are I consumers and J producers. Assume all these are price takers. Now suppose one more producer enters int the market. What happens to (a) Supply and demand curve (b) Equilibrium price (c) Surplus of incumbent firms (d) Consumer surplus (e) Total surplus

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Answer #1

There are I consumers and J producers that is this is a perfectly competitive market. One more producer enters. This will increase supply, the supply curve of industry shifts to the right. So the equilibrium price will be decreased. The surplus of the incumbent firms will be decreased as the price is decreased. Consumer surplus will increase as the price is decreased. Total surplus=(consumer surplus+producer surplus). The total surplus will be unchanged as the decrease in producer surplus equal to increase in consumer surplus.  

Increase in consumer surplus is (B+C+D). Decrease in producer surplus is (B). Now at new equilibrium price P2 consumer surplus is (A+B+C+D). Producer surplus is E.

Total surplus is (A+B+C+D+E)

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