8. "High prices traditionally cause expansion in an industry, eventually bringing an end to high prices and manufacturers' prosperity." Explain, using appropriate diagrams. The figure below shows that although high prices cause an industry to expand, entry into the industry eventually returns prices to the point of minimum average total cost. In the figure, the industry i originally in long-run equilibrium. The industry produces output Q1, where supply curve $1 intersects demand curve D1, and the price is P1. At this point, the typical firm produces output q . Since price 1 equals average total cost at that point, the firm makes zero economic profit. Now suppose an increase in demand occurs, with the demand curve shifting to D . This causes "strong 2 prices" in the industry, as the price rises to P . It 2 also causes the industry to increase output to Q. With 2 the higher price, the typical firm increases its output from q to q, and now makes positive profits, 1 2 since price exceeds average total cost. However, the positive profits that firms earn encourage other firms to enter the industry. Their entry, "an expansion in an industry", leads the supply curve to shift to $. The new equilibrium reduces the 3 price back to P, "bringing an end to high prices and manufacturers' prosperity", since now firms 1 produce q and earn zero profit again. The only long-lasting effect is that industry output is Q, a higher 1 3 level than originally