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Assume there is a decrease in costs for the firm due to a new reserve of...

  1. Assume there is a decrease in costs for the firm due to a new reserve of a key resource being discovered. Explain what will happen in the firm and the market. What will happen to equilibrium price and quantity for the firm and market. What happens to the number of firms in the market? Be sure to show the results on the graph as well as explain. Be sure to identify the initial equilibrium. (10 points)
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If there is decreases in cost of production due to some resource is discovered, producers are induced to produce more of the goods and services at reduced cost and earn more profit which will raise the aggregate supply of goods and services in the economy. It result in fall in price level from P to P1 and output rises from Y to Y1 and shift overall economic equilibrium from point A to B. Firms will enter the market after observing the fall in cost of producing goods.

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