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ECON 5000(003)
Spring 2010
Exercise 2 – Short-Run Changes in Competitive Markets
This exercise continues/extends the production scenario developed in Exercise 1.
Your firm is one of thirty virtually identical firms that supply the product in question to a
market that includes a significant number of buyers. The product is generic, in the sense
that it must conform to given engineering specifications and that no firm has any patents
or other proprietary licenses on the product or its components. The economies of scale in
producing the product are very “tight”, so that each firm uses virtually identical capital
and processes to manufacture the product. Bottom line: The market for this product is
perfectly competitive.
1. The perfect competition and identical capital and processes assumptions imply that the
firms producing the product will have virtually equal “market shares” – i.e., each firm
will supply 1/30th (or 3 1/3%) of the total market quantity supplied at any given time.
With this in mind, use the relevant data from Exercise 1 (especially Table 1.3), to
complete the industry’s market supply schedule below:
P
Q/Sm
$18.47
______
$19.00
______
$19.08
______
$20.83
______
$22.92
______
$34.83
______
P: Market price of product
Q/Sm: Market quantity supplied per day
2. The market demand for this product is expressed by the equation
Q/Dm = 69,528- 2697P
In Exercise 1 you found that your firm’s breakeven point is at a product price of $20.93;
also, note that market theory holds that a competitive market is in long run equilibrium at
the breakeven price. Use the market demand equation, above, and relevant breakeven
information from Exercise 1 to prove that the market will be in long run equilibrium at a
price of $20.93.
Now let’s explore what happens when market conditions change.
3. Suppose that the market demand for the product decreases by 10%
a) Derive the new market demand equation (from the function in 2, above).
b) Use the relevant information from the market supply schedule (1, above), to
derive an estimated market supply equation for the P – Q range in which the
new market equilibrium will fall).
c) Use these two equations to determine what will be the new equilibrium
product price, market quantity demanded, and market quantity supplied.
d) Determine what will be your firm’s optimum quantity supplied and economic
profit or loss under the new market conditions.
4. Return to the original market demand equation; now suppose that the market demand
for the product increases by 10%
e) Derive the new market demand equation (from the function in 2, above).
f) Use the relevant information from the market supply schedule (1, above), to
derive an estimated market supply equation for the P – Q range in which the
new market equilibrium will fall.
g) Use these two equations to determine what will be the new equilibrium
product price, market quantity demanded, and market quantity supplied.
h) Determine what will be your firm’s optimum quantity supplied and economic
profit or loss under the new market conditions.
The following pages are your submission sheets for this exercise.
ECON 5000(001)
Name __________________
Exercise 2 – Short-Run Changes in Competitive Markets
1. The industry’s market supply schedule
P
Q/Sm
$18.47
______
$19.00
______
$19.08
______
$20.83
______
$22.92
______
$34.83
______
P: Market price of product
Q/Sm: Market quantity supplied per day
2. With the market demand equation
Q/Dm = 69,528- 2697P
and a product
price of $20.93, the market quantity demanded will be ____________ units per day
and the market quantity supplied will be _________________ * ____________________
= ____________ units per day.
3. Suppose that the market demand for the product decreases by 10% (attach a sheet
showing your work)
a) The new market demand equation is
b) The market supply equation for the P – Q range in which the new market
equilibrium will fall is
c) (Attach a sheet showing your work.) Using these two equations, the new
equilibrium product price will be $ ____ . ____
The market quantity demanded will be ____________ units per day
And the market quantity supplied will be ____________ units per day
d) Your firm’s optimum quantity supplied will be ________ units per day
and your economic profit or loss under the new market conditions will be
$ ______ . ___ per day (specify profit or loss)
4. Starting from the original demand equation in 2, above, suppose that the market
demand for the product increases by 10% (attach a sheet showing your work)
e) The new market demand equation is
f) The market supply equation for the P – Q range in which the new market
equilibrium will fall is
g) (Attach a sheet showing your work.) Using these two equations, the new
equilibrium product price will be $ ____ . ____
The market quantity demanded will be ____________ units per day
And the market quantity supplied will be ____________ units per day
h) Your firm’s optimum quantity supplied will be ________ units per day
and your economic profit or loss under the new market conditions will be
$ _____ . ___ per day (specify profit or loss)