Economic for Market Structure

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Q.5.1 a)

Figure 1:

Where there is a threat of bird flu which is a deadly disease spreading among chickens, the demand for chickens will decrease and the demand curve will shift to the left as shown in the figure 1. As a result, the equilibrium market price will decrease from P1 to P2 and the equilibrium market quantity will decrease from Q1 to Q2 in the short run.

Q.5.1 b)

Figure 2:

As the poultry in country X is perfectly competitive with the supply of chicken coming from both domestic firms and farms located in the neighboring country Y. When the government of country X forbids the import of chickens from country Y in order to prevent the spreading of bird flu, the supply of chicken in country X will decrease and the supply curve will shift to the left as shown in the figure 2. As a result, the equilibrium price will increase from P1 to P2 and the equilibrium quantity will decrease from Q1 to Q2.

Figure 3:

In a perfect competition, there are many sellers and buyers but each participant is insignificant relative to the market. Individual consumer or producer cannot affect the market price. They are price takers. The equilibrium market price is P1 as shown in the figure 3. A farm can sell a vast amount of at P1 without affecting the market price, implying the demand curve perceived by the firm is horizontal, i.e. perfectly elastic. In Marginal approach to profit maximization, the farm’s MR curve coincides with its demand curve, therefore P1 = MR1 as shown in the figure 3.

As the supply of chicken in country X decreases and the supply curve shifts to the left, the equilibrium market price increases from P1 to P2 as shown in the figure 2. Poultry industry is a perfect competitive market where P1 = MR1. The MR of a farm also increases from MR1 to MR2. In order to maximum profit, a farm will produce and sell the chicken where MR=MC and MC is rising. As a result, the output level of domestic farm increases from Q1 to Q2 as shown in the figure 3.

Q.5.1 c)

Figure 4:

In a perfect competition in the long run, when a firm produces at Q as shown in the figure 4, P1 = MR1 = AC1 = MC and all the farms earn zero economic profit, i.e. total revenue (TR) is equal to total cost (TC).

At the beginning, MC = MR1 as shown in the figure 4. When the government of both domestic farms and farms in country Y to install new facilities to raise farm’s hygiene standard, the average cost of a firm will shift upward from AC1 to AC2 with no change in marginal cost, TC is greater than TR, therefore farm faces economic loss.

Figure 5: Figure 6:

In the long run, the existing firms get losses can leave the industry. As shown in the figure 5, when there is a farm leaves the market, the supply curve shifts to the left and the equilibrium market quantity decreases from Q1 to Q2. The equilibrium market price increases form P1 to P2. Farm continuous to leave until price increase to the point where MR =AC= MC (zero economic profit).

For farms remain in the industry will increase the price of chicken, therefore P1 increase to P2 with the increase in the MR. As a result, MC = MR2 to determine the output level of typical domestic farm. It will increase in a farm’s output from q1 to q2 as shown in the figure 6.

In conclusion, market equilibrium price increases from P1 to P2 and market equilibrium quantity decreases from Q1 to Q2 and the output level of typical domestic farm increases from q1 to q2.

Q.5.2 a)

At the equilibrium, quantity demanded is equal to quantity supplied (Qd = Qs). 6000-30P = -500+20P
P = $130
Therefore, the equilibrium market price is $130.

Given the equilibrium market price: $130
Qd = 6000-30P
Qd = 6000-30(130)
Qd = 2100
Therefore, the market quantity for good X is 2100 (thousand units).

Figure: 7

Q.5.2 b)

Figure: 8

As all firms in the market is...
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