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Chapter 8: Problem 21

Suppose that eggs are produced competitively and the egg industry is a constant cost industry. a. Fill in the table with appropriate responses (increases, decreases, no change) in response to each of the following events: $$\begin{array}{|l|c|c|}\hline & \begin{array}{c}\text { Short-Run } \\\\\text { Effect } \\ \text { on Price }\end{array} & \begin{array}{c}\text { Long-run } \\\\\text { Effect } \\\\\text { on Price } \end{array} \\\\\hline \text { Demand for eggs increases } & & \\ \hline \begin{array}{l}\text { Cost of corn (an input into } \\ \text { egg production) decreases }\end{array} & & \\\\\hline\end{array}$$ b. Which event has a permanent effect on the price of eggs, and which does not? c. How would your answer to (b) change if the egg industry were a decreasing cost industry?

Short Answer

Expert verified
In a constant cost industry, neither event has a permanent price effect. In a decreasing cost industry, reduced input costs could permanently lower prices.

Step by step solution

01

Understanding the Scenario

In a constant cost industry, long-run supply is perfectly elastic, so in the long run, any changes in demand or cost will not affect the price. We need to consider both short-run and long-run effects for changes in demand and input costs.
02

Short-Run Effect on Price for Increased Demand

When demand for eggs increases, the immediate effect is a higher market price as suppliers are unable to instantly increase capacity.
03

Long-Run Effect on Price for Increased Demand

In a constant cost industry, suppliers adjust production to meet the new demand, returning price to its original level in the long run.
04

Short-Run Effect on Price for Decreased Input Cost

When the cost of corn decreases, it reduces the production cost of eggs. This usually decreases the price of eggs in the short run as producers pass on some savings to consumers.
05

Long-Run Effect on Price for Decreased Input Cost

In the long run, with constant costs, the price of eggs returns to equilibrium because all producers can produce at the lower cost, fully adjusting supply to the new conditions.
06

Event with Permanent Effect on Price

In a constant cost industry, neither increased demand nor decreased input costs change the price in the long run. Therefore, neither event has a permanent effect on the price.
07

Effect in a Decreasing Cost Industry

If the egg industry was a decreasing cost industry, a decreased input cost would likely lower the price permanently as suppliers can increase production more efficiently, leading to lower prices than before.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Short-Run Effects
In economics, understanding the short-run effects on prices within a constant cost industry is crucial. The short run is a period where at least one factor of production is fixed. This means that when demand spikes, suppliers cannot immediately adjust their production levels to meet this demand due to resource constraints. As a result, a sudden increase in demand for eggs, for example, leads to a temporary rise in prices. Suppliers are scrambling to fulfill consumer demand with their existing limited resources.
  • Increased demand leads to higher prices due to fixed resources.
  • Cost decreases result in slightly lower prices as savings are passed on to consumers temporarily.
You can think of the short-run effects almost like a quick adjustment phase, where the market temporarily inflates or deflates prices in response to changes in demand or input costs before more sustainable solutions are implemented.
Long-Run Effects
Long-run effects in a constant cost industry reveal the adaptability of the market. In the long run, all factors of production become variable, allowing suppliers to adjust to changes in market conditions.
When demand rises in the long run, suppliers will increase their production levels to meet this new demand, and prices will stabilize back to the original equilibrium price. For constant cost industries, this means prices remain unaffected by changes in demand in the long run.
  • The ability to expand means supply eventually meets demand at equilibrium.
  • Input cost reductions, in the long run, are absorbed as all firms can increase production capacity efficiently.
This resilience means that in constant cost industries, any temporary price changes in the short run are corrected to original levels as firms fully adjust their production processes over time.
Supply and Demand
Supply and demand are the two key pillars driving market dynamics. In a constant cost industry, the supply side exhibits significant resilience. Supply curves are typically horizontal, which indicates that any quantity of a commodity can be offered for the same cost in the long run.
Demand increase impacts:
  • Short-run: Price temporarily increases.
  • Long-run: Supply adjusts, price returns to equilibrium.
Similarly, a decrease in cost of production inputs doesn鈥檛 lead to a long-term reduction in price because the long-run supply curve absorbs this change effectively. In effect, while short-run disruptions can cause price and supply fluctuations, supply and demand balance out in the long-run.
Decreasing Cost Industry
The concept of a decreasing cost industry adds an interesting twist to the typical supply and demand story. In such industries, costs decrease as firms produce more, usually due to technological improvements or economies of scale. If the egg industry were a decreasing cost industry, the implications would be quite different.
  • A drop in input costs could lead to a permanent decrease in price.
  • Firms can produce larger quantities more efficiently, causing lasting lower prices.
This results in a downward sloping long-run supply curve, where the industry can achieve lower costs per unit as output increases. The ongoing efficiency improvements translate to more competitive pricing, permanently altering price levels compared to constant cost industries where prices return to the original equilibrium.

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Most popular questions from this chapter

Marty sells flux capacitors in a perfectly competitive market. His marginal cost is given by \(M C=Q\). Thus, the first capacitor Marty produces has a marginal cost of \(\$ 1,\) the second has a marginal cost of \(\$ 2,\) and so on. a. Draw a diagram showing the marginal cost of each unit that Marty produces. b. If flux capacitors sell for \(\$ 2\), determine the profitmaximizing quantity for Marty to produce. c. Repeat part (b) for \(\$ 3, \$ 4,\) and \(\$ 5\). d. The supply curve for a firm traces out the quantity that firm will produce and offer for sale at various prices. Assuming that the firm chooses the quantity that maximizes its profits [you solved for these in (b) and (c)], draw another diagram showing the supply curve for Marty's flux capacitors. e. Compare the two diagrams you have drawn. What can you say about the supply curve for a competitive firm?

The canola oil industry is perfectly competitive. Every producer has the following long-run total cost function: \(L T C=2 Q^{3}-15 Q^{2}+40 Q,\) where \(Q\) is measured in tons of canola oil. The corresponding marginal cost function is given by \(L M C=6 Q^{2}-30 Q+40\) a. Calculate and graph the long-run average total cost of producing canola oil that each firm faces for values of \(Q\) from 1 to 10 . b. What will the long-run equilibrium price of canola oil be? c. How many units of canola oil will each firm produce in the long run? d. Suppose that the market demand for canola oil is given by \(Q=999-0.25 P\). At the long-run equilibrium price, how many tons of canola oil will consumers demand? e. Given your answer to (d), how many firms will exist when the industry is in long-run equilibrium?

For the past nine months, Iliana has been producing artisanal ice creams from her small shop in Chicago. She's just been breaking even (earning zero economic profit) that entire time. This morning, the state Board of Health informed her that it is doubling the annual fee for the dairy license under which she (and other ice cream makers) operates, retroactive to the beginning of her operations. a. In the short run, how will this fee increase affect Iliana's output level? Her profit? b. In the long run, how will this fee increase affect Iliana's output level? c. Suppose that instead of doubling the annual fee for a license, the state Board of Health required Iliana (and other ice cream makers) to treat every pint of ice cream to prevent the growth of bacteria. How would this regulation affect Iliana's production decision and profit in both the short and long run?

Five hundred small almond growers operate areas with plentiful rainfall. The marginal cost of producing almonds in these locations is given by \(M C=\) \(0.02 Q,\) where \(Q\) is the number of crates produced in a growing season. Three hundred almond growers operate in drier areas where costly irrigation is required. The marginal cost of growing almonds in these locations is given by \(M C=0.04 Q\). a. Find the individual supply curve for each type of almond grower. (Hint: Remember that the supply relationship expresses the quantity brought to market at various prices. Remember also that for a perfectly competitive firm, \(P=M R .\) ) b. "Add up" the individual supply curves to derive the market supply curve. c. If the market demand for almonds is \(Q_{d}=\) \(105,000-2,500 P,\) what will the equilibrium price of almonds be? The equilibrium quantity? d. How many almonds will each type of almond grower produce at that price? e. Verify that the total production of all almond growers equals the equilibrium quantity you found in part (c).

Hack's Berries faces a short-run total cost of production given by \(T C=Q^{3}-12 Q^{2}+100 Q+1,000\) where \(Q\) is the number of crates of berries produced per day. Hack's marginal cost of producing berries is \(3 Q^{2}-24 Q+100\) a. What is the level of Hack's fixed cost? b. What is Hack's short-run average variable cost of producing berries? c. If berries sell for \(\$ 60\) per crate, how many berries should Hack produce? How do you know? (Hint: You may want to remember the relationship between \(M C\) and \(A V C\) when \(A V C\) is at its minimum.) d. If the price of berries is \(\$ 79\) per crate, how many berries should Hack produce? Explain.
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