This occurs under the premise of free market entry, and varying plant size. This is normally shown in conventional teaching material in a static-comparative mode applied to aggregates. The analysis and graphical illustration of market forces has always been difficult, because of the simultaneous reaction of various actors, and the complexity of related movements. This can be noted particularly when plant size variations lead to economies of scale. 2.1 Assumptions The model shown here is based on the following assumptions.
All suppliers automatically adjust plant capacity depending on the profits of the preceding period.
This serves to illustrate the exit of a firm from the market where loss of market share and therefore profits reflect inability to compete. Market entry is not envisaged in this model. Therefore in this model it is assumed that a C and b C are in a direct arithmetic-linear relationship to variations of plant size. Plant capacity dictates markets share for the suppliers up to the point where their maximum plant capacity has been achieved. With linear short-run cost functions profits are maximized when output is at maximum capacity.