Improved manufacturing efficiency could cause price reduction of goods, increase manufacturer's profit (still asks for the same price, but has less expenses), and what else? Is it possible to predict what would be more dominant? If not, is there historical statistical data about this?


Step 1) Improved manufacturing efficiency would lower the marginal cost of production for firms, thusly lowering the average total cost per unit.

Step 2) In a generic competitive market, lower ATC leads to profits in the short run, and increased number of producers in the long run.

Step 3) Increased number of producers moves the supply curve to the right (increasing supply), and the resulting equilibria has a lower price and a higher quantity. Profits for the individual firms decline as price falls, settling again at zero.

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  • $\begingroup$ what happens after step 3, if the demand doesn't change? $\endgroup$ – Sparkler Apr 24 '15 at 18:55
  • $\begingroup$ Demand remains constant for this entire period, the demand curve does not shift. (Quantity demanded is not the same as demand.) After step three, the model is in equilibria, and remains there indefinitely until something exogenous changes. $\endgroup$ – RegressForward Apr 24 '15 at 22:14

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