Suppose that each of the following is true: (1) The laptop computer industry is perfectly competitive, and the firms that assemble laptops do not also make the displays or screens; (2) the laptop display industry is also perfectly competitive; and (3) because the demand for laptop displays is currently relatively small, firms in the laptop display industry have not been able to take advantage of all the economies of scale in laptop display production. Use a graph of the laptop computer market to illustrate the long-run effects on equilibrium price and quantity in the laptop computer market of a substantial and sustained increase in the demand for laptop computers. Use another graph to show the effect on the cost curves of a typical firm in the laptop computer industry. Briefly explain your graphs. Do your graphs indicate that the laptop computer industry is a constant-cost industry, an increasing-cost industry, or a decreasing-cost industry?

Step by step solution

01

Understanding Perfect Competition

In a perfectly competitive market, firms are price-takers, which means that they must accept the market price determined by the forces of demand and supply. The products are homogeneous, and there are many buyers and sellers.

02

Drawing the initial equilibrium

Draw a demand-supply graph for the laptop computer market before the increase in demand. Label the initial equilibrium price and quantity (P1, Q1). For the laptop manufacturing industry graph, draw the cost curves which include average total cost (ATC), marginal cost (MC), and average variable cost (AVC) curves.

03

Shift in Demand

Due to an increase in the demand for laptops, the demand curve will shift to the right. This leads to an increase in the equilibrium price and quantity (P2, Q2). This will increase the demand for laptop displays leading to potential economies of scale in the laptop display industry.

04

Changes in the Cost Curves

With the increase in demand, the laptop manufacturing firms will start to increase output, moving along the MC curve. If the laptop display industry achieves significant economies of scale, this will lower the costs of the laptop manufacturing firms, making the MC and ATC curves shift downward.

05

Identifying the Type of Industry

The type of the industry can be determined by observing the change in long-run average total cost (LRATC) curve. If LRATC remains constant as output increases, the industry is a constant-cost industry. If LRATC decreases as output increases, the industry is a decreasing-cost industry. If LRATC increases as output increases, the industry is an increasing-cost industry. In this case, if economies of scale are achieved, it indicates a decreasing-cost industry.

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!