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Use one new firm diagram with ATC, MC, and AVC to show when a decrease in demand will not lead a firm to shut down. Be sure to clearly label the diagram, relevant points and areas. In the long run, what is the effect of the decrease in demand on the equilibrium price and quantity? Use new market and firm diagrams to defend your answer.

Use one new firm diagram with ATC, MC, and AVC to show when a decrease in demand will not lead a firm to shut down. Be sure to clearly label the diagram, relevant points and areas. In the long run, what is the effect of the decrease in demand on the equilibrium price and quantity? Use new market and firm diagrams to defend your answer.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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please only solve parts d, e, and f!

**Title: Impact of Demand Shocks on Small Business Operations During COVID-19** **Introduction** In July 2020, researchers investigated the effects of supply chain disruptions and demand shocks on small businesses during the COVID-19 pandemic. Their focus was to understand whether these businesses were more affected by the supply side or by a decrease in demand. **Findings** The research concluded that demand shocks were more influential in the decisions made by small business firms to close temporarily or permanently. Specifically, the data revealed: - 41.3% of businesses reported temporary closures due to COVID-19. - A minor 1.8% indicated permanent closures due to the pandemic. - Only 1.3% closed temporarily for other reasons, while 55.5% continued operations. **Scenario Analysis** Assuming the local restaurants represent typical small businesses, here is an analysis of the impact of a demand decrease and its implications: **a) Equilibrium Diagrams:** - **Market Diagram:** Illustrates supply and demand for restaurants showing market equilibrium. - **Cost Diagram:** Demonstrates a typical restaurant's Average Total Cost (ATC) and Marginal Cost (MC) in equilibrium. **b) Decrease in Demand Impact:** - The reduction in demand leads to a decreased quantity of meals served. - Restaurants face economic loss, indicated by: - Lower break-even price - Alterations in cost curves (ATC and MC) - Marginal Revenue (MR) adjustments **c) Shutdown Consideration:** - Evaluate whether a restaurant should cease operations due to sustained economic losses by analyzing cost structures and market conditions. **d) New Firm Diagram:** - Introduce a diagram including ATC, MC, and AVC to depict why demand reduction might not necessarily lead to shutdown. - Explain protective factors and areas where costs remain below break-even despite lowered demand. **e) Long-Run Effects:** - Analyze how persistent demand decrease affects long-term equilibrium price and quantity using updated market diagrams. **f) Comparison of Equilibria:** - Compare the new equilibrium with the previous state: - Assess changes in restaurant numbers and output levels. - Discuss whether businesses experience reduced, unchanged, or different production scales. **Conclusion** The research highlights demand shocks as critical decision factors for temporary or permanent business closures in the small business sector. This analysis helps understand strategic responses to demand decreases in perfectly competitive markets.
Transcribed Image Text:**Title: Impact of Demand Shocks on Small Business Operations During COVID-19** **Introduction** In July 2020, researchers investigated the effects of supply chain disruptions and demand shocks on small businesses during the COVID-19 pandemic. Their focus was to understand whether these businesses were more affected by the supply side or by a decrease in demand. **Findings** The research concluded that demand shocks were more influential in the decisions made by small business firms to close temporarily or permanently. Specifically, the data revealed: - 41.3% of businesses reported temporary closures due to COVID-19. - A minor 1.8% indicated permanent closures due to the pandemic. - Only 1.3% closed temporarily for other reasons, while 55.5% continued operations. **Scenario Analysis** Assuming the local restaurants represent typical small businesses, here is an analysis of the impact of a demand decrease and its implications: **a) Equilibrium Diagrams:** - **Market Diagram:** Illustrates supply and demand for restaurants showing market equilibrium. - **Cost Diagram:** Demonstrates a typical restaurant's Average Total Cost (ATC) and Marginal Cost (MC) in equilibrium. **b) Decrease in Demand Impact:** - The reduction in demand leads to a decreased quantity of meals served. - Restaurants face economic loss, indicated by: - Lower break-even price - Alterations in cost curves (ATC and MC) - Marginal Revenue (MR) adjustments **c) Shutdown Consideration:** - Evaluate whether a restaurant should cease operations due to sustained economic losses by analyzing cost structures and market conditions. **d) New Firm Diagram:** - Introduce a diagram including ATC, MC, and AVC to depict why demand reduction might not necessarily lead to shutdown. - Explain protective factors and areas where costs remain below break-even despite lowered demand. **e) Long-Run Effects:** - Analyze how persistent demand decrease affects long-term equilibrium price and quantity using updated market diagrams. **f) Comparison of Equilibria:** - Compare the new equilibrium with the previous state: - Assess changes in restaurant numbers and output levels. - Discuss whether businesses experience reduced, unchanged, or different production scales. **Conclusion** The research highlights demand shocks as critical decision factors for temporary or permanent business closures in the small business sector. This analysis helps understand strategic responses to demand decreases in perfectly competitive markets.
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