Jana no MBA: Market Equilibrium Price/ Output and Perfecttly Competitive Market

Part 1: Office building maintenance plans call for the stripping, waxing, and buffing of ceramic floor titles. This work is contracted out to office maintenance firms, and both technology and labor requirements are very basic. Supply and demand conditions in this perfectly competitive service market in New York are:

Qs = 2P – 20 (Supply)

Qd = 80 – 2P (Demand)

*Where Q is thousands of hours of floor reconditioning per month, and P is the price per hour.

A) Algebraically determine the market equilibrium price/output combination.

Qs = 2P – 20 (Supply)

Qd = 80 – 2P (Demand)

To determine the equilibrium price/output combination, we have to consider that the equilibrium price for the some goods or service is the price at which the quantity demanded of some goods or service by consumers equals the quantity that producers are willing to supply, the equilibrium quantity, (Farnham, 2010). At any other price, there will be an imbalance between quantity demanded and quantity supplied. Therefore, the equilibrium price/output combination will be Quantity demanded equals to Quantity Supplied that gives the follow equation at figure 1:

Qd = Qs

80 – 2P = 2p – 20

-2P -2P = - 80 - 20

- 4P = - 100

P = 100/4

P = 25

FIGURE 1:

Algebraically, using the equation from the exercise we can find out

that at the point where Qd=Qs the price is $ 25,00.

With the price information is possible to find what is the quantity demanded and the quantity supplied at the equilibrium price/output combination, as follow at figure 2 and 3:

FIGURE 2: FIGURE 3:

Qs = 2.25 – 20

Qs = 50 – 20

Qs = 30

Qs = 2.25 – 20

Qs = 50 – 20

Qs = 30

From this information we can create a table 1, where at the quantity demanded 30 the price is $25,00 and at the quantity supplied 30 the price is also $25,00:

Table 1:

Quantity supplied	Price per hour
10	5
15	10
20	15
25	20
30	25
35	30
40	35
45	40
50	45
55	50

Quantity demanded	Price per hour
50	5
45	10
40	15
35	20
30	25
25	30
20	35
15	40
10	45
5	50

Based on the information in table 1, and then draw the graphic at figure 4 to illustrate the interaction between demand and supply, and the equilibrium point or equilibrium price/output combination.

FIGURE 4:

Equilibrium Point

Part 2: The figure below shows a firm in a perfectly competitive market:

a) Find the price below which the firm will go out of business.

If the price falls below the price P2 and is expect to remain there the firm should go out of the business, or according to Farnham, (2010) manager would be better off “shutting the firm down”. Because at this point the price is equals a firm’s minimum average variable cost, below which is more profitable for the perfect competitive firm to stop the production than continue. At this point the firm would lose only fixed costs. If continue to operate below P2 the firm would lose both costs fixed and variable because the price will be less than AVC (average variable cost). At the point b in the figure is the shutdown point for a perfectly competitive firm.

At the price P3 and quantity 10 for the perfect competitive firm is the zero profit point, where P3 is equal to ATC (average total cost). The firm will always following the profit maximization, however if the price change for a price between P3 and P2, where the quantity will be around 8 and 10 the company should continue to produce because at least the price earned cover the all the variable costs. Although, the firm could not continue forever in this situation, however between prices point P3 and P2 is rational that the manager should wait to see if the product price will increase and Shut down below P2.

I illustrated at figure 5 below the relationship among prices, costs, and profits, to make clearer the explanation above. At the figure 5, above the price P3 the company have profit, between price P3 and P2 the company is losing money but should continue the production to wait the price raise, finally below price P2 at the point b the company should go out of the business.

FIGURE 5:

Profit

Loosing but continue

b) What is the firm’s long run supply curve?

According to Farnhan (2010) the supply curve is the portion of the firm’s maginal cost curve that lies above the minimum average variable cost. A supply curve shows the relationship between different prices and the quantities that sellers will offers for sale, so the price raises the quantity supplied rise, lower prices the quantity supplied decrease (Kurtz, 2010).

The figure 6 shows the supply curve, as you can see if the price determined in the market is P2 the firm will produce 8 outputs, because that is the profit maximization level where P=MR=MC an P=AVC, if the price increase to P3 the quantity produced will be 10, then if increase to P4 again the quantity increase to 11. This procedure traces the supply curve for the perfect competitive firm it shows the relations ship between the price and quantity that the firm will supply or produce. The supply curve start at the point b because below this point the firm will not produce and then above this point the curve is upward sloping because the firm’s marginal cost are increasing as the firm reaches the capacity of its fixed inputs.

FIGURE 6: