1. Figure VI-2.1: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K The Market Q P S LR For an increase in demand: 1.Start at P SR = P LR, Π = 0

2. Figure VI-2.2: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K 105K The Market Q P D’ $35 S LR For an increase in demand: 1.Start at P SR = P LR, Π = 0 2.Increase demand 3.P SR > P LR, Π > 0 causes entry.

3. Figure VI-2.3: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K 105K110K The Market Q P D’ $35 S’ SR S LR $30 For an increase in demand: 1.Start at P SR = P LR, Π = 0 2.Increase demand (Subsidy) 3.P SR > P LR, Π > 0 causes entry. 4.Entry causes S to increase. 5. So costs to increase and P decreases until P SR = P LR and Π = 0 (back in LR equilibrium).

4. Figure VI-2.6: A Decrease in Supply in an Increasing Cost Industry with Legal Entry Barriers D S SR $20 80K 100K The Market Q P S LR For a decrease in supply: 1.Start at P SR = P LR, Π = 0 2.Short-run S decreases producing Π > 0. 3.Entry barrier prevents S from increasing. S’ SR $30

5. Explanation of Figure VI-2.6 – (1) Market is in LR equilibrium /Social Welfare Maximum – (2) An decrease in market supply occurs because entry barrier imposed. – (3) Decreased supply causes an increase in the market price which creates positive profits (P > P LR ). – (4) Positive profits would cause new entry but new entry cannot occur because of the legal entry barriers. These legal entry barriers create a Welfare Loss