Suppose rampant fears of Mad Cow disease cause a decrease in demand for beef. What will be the short-run effects of the declining demand for beef on the firm and the market? What will be the long-run effects? Explain in words and graphs. ---Try this first assuming the beef industry is a constant cost industry. Then try it assuming the beef industry is an increasing cost industry.----
I will be happy to critique your thinking on this.
In the short run, a decrease in demand for beef resulting from fears of Mad Cow disease will have different effects depending on whether the beef industry is a constant cost industry or an increasing cost industry. Let's analyze both scenarios.
1. Constant Cost Industry:
In a constant cost industry, the cost of inputs does not vary with the level of industry output. In this case, a decrease in demand for beef will lead to a decrease in both the price and quantity of beef in the market.
- Firm level effects: Individual beef firms will experience a decrease in their sales and revenue due to the declining demand. As a result, these firms may reduce their production levels but are unlikely to exit the industry in the short run since their costs are not directly affected. However, individual firms may still experience financial difficulties due to lower profits.
- Market level effects: The decrease in demand for beef will cause the market price of beef to drop due to reduced consumer willingness to pay. Consequently, the market quantity of beef supplied will decrease, aligning with the reduced demand. The market will experience a downward shift in both the demand and supply curves, resulting in a new equilibrium with a lower price and quantity of beef.
Graphically, the demand curve will shift to the left, causing the price to decline from P1 to P2, and the quantity consumed to decrease from Q1 to Q2. The quantity supplied by firms will also decrease from Q1 to Q2. Both of these effects will be reflected in the graph as a leftward shift in the supply curve.
2. Increasing Cost Industry:
In an increasing cost industry, the cost of inputs rises as the industry expands due to factors such as scarcity of resources or increased competition for inputs. In this case, the long-run effects of declining beef demand will be different from the constant cost scenario.
- Firm level effects: Individual beef firms will face a decrease in demand and experience lower sales and revenue. Since the industry is already experiencing increasing costs, the firms may struggle to cover their costs and maintain profitability. Some firms may choose to exit the industry if they cannot sustain their operations.
- Market level effects: The decrease in demand will lead to a lower market price and quantity of beef in the short run. However, in the long run, as firms exit the industry, the supply curve will shift to the left, reducing the quantity supplied and further pushing the price upward. This process will continue until the price settles at a level where the remaining firms can cover their increasing costs.
Graphically, the initial decrease in demand will cause the price to decline, similar to the constant cost scenario. However, in the long run, the supply curve will shift upward and to the left, causing the price to increase. The final equilibrium will have a higher price and a lower quantity of beef compared to the initial equilibrium.
It is important to note that these explanations assume certain assumptions about the beef industry, such as constant or increasing costs. In reality, the effects of declining beef demand can be influenced by various other factors, such as government policies, technological changes, and industry structure.