Between 2000 and 2009, concerns about the health effects of trans-fatty acids decreased the demand for margarine.
Question:
Between 2000 and 2009, concerns about the health effects of trans-fatty acids decreased the demand for margarine. Although total consumption in the United States decreased by roughly half, the price of margarine in 2009 was roughly the same, in real terms, as the price in 2000. Why didn’t the decrease in demand decrease the equilibrium price?
The margarine industry is an example of a constant-cost industry. As the total output of the industry changes, the prices of the key inputs to the production of margarine don’t change, so the unit cost of production is unaffected by changes in total output. Of course a decrease in demand decreases the equilibrium price in the short run, but the exit of firms from the unprofitable industry causes the price to rise, and in the new long-run equilibrium, the original price—equal to the constant long-run marginal cost—will be restored.
Question.
How does a permanent decrease in demand affect the equilibrium price in a constant-cost industry?
Step by Step Answer:
Microeconomics Principles Applications And Tools
ISBN: 9780134078878
9th Edition
Authors: Arthur O'Sullivan, Steven Sheffrin, Stephen Perez