Learning Goals:
1. What conditions are needed to obtain a market structure with perfect
competition?
Perfectly competitive markets have five characteristics that force firms to
be price takers:
[Link] market consists of many small buyers and sellers.
[Link] firms produce identical products.
[Link] market participants have full information about price and product
characteristics.
[Link] costs are negligible.
[Link] can freely enter and exit the market.
2. Are these conditions satisfied for the market for bus transport services?
Many small buyers and sellers
- **Analysis**: This condition is partially satisfied. There are often
numerous buyers (passengers) and sellers (bus operators), especially in
larger cities or regions with multiple transport providers. However, in
smaller towns or rural areas, the number of bus operators might be
limited, leading to less competition. Some cities may also have
monopolistic or oligopolistic conditions where a single operator or a few
dominate the market.
Identical products
- **Analysis**: This condition is not fully satisfied. Bus services are not
identical due to differences in routes, schedules, quality of buses,
amenities (e.g., air-conditioning, Wi-Fi), and customer service. These
variations mean that bus services are differentiated rather than
homogeneous, which deviates from the perfectly competitive model.
Full information about price and product characteristics
- **Analysis**: This condition is partially met. In some markets,
especially those with digital platforms, passengers have access to
information about prices and routes. However, not all passengers may
have full information, particularly in regions without centralized ticketing
systems or online platforms. Additionally, service quality is harder to
quantify and compare.
Negligible transaction costs
- **Analysis**: This condition is mostly satisfied. Transaction costs, such
as booking fees or time spent buying tickets, are relatively low for bus
services. However, there may be indirect costs like traveling to bus
stations or waiting for buses, which could vary significantly depending on
the location.
Free entry and exit of firms
- **Analysis**: This condition is often not satisfied. Regulatory barriers,
such as licensing, route permits, and compliance with safety standards,
can restrict entry into the bus transport market. Additionally, high initial
investments in buses and infrastructure can act as a significant barrier to
entry. Exit is also not entirely free due to sunk costs and potential legal or
contractual obligations.
Conclusion
The market for bus transport services does not fully meet the conditions
for perfect competition. While some characteristics like the presence of
many buyers and sellers and low transaction costs are present, significant
deviations such as product differentiation, barriers to entry and exit, and
incomplete information make it more characteristic of a monopolistic or
oligopolistic market.
3. How is supply related to the market price in the short run? Do not just
state the relevant considerations inwords, but ..show the implied short run
supply curve in the graph; derive the mathematical expression for that
supply curve.
The firm’s short run supply curve, S, is a solid red line in the figure. At
prices above $5, the short run supply curve is the same as the marginal
cost curve. The supply is zero when price is less than the minimum of the
AVC curve of $5.
4. How can we derive the profits of the firm from the picture?
5. What is the structure of market supply in the long run?
The competitive market supply curve is the horizontal sum of the supply
curves of the individual firms in both the short run and the long run. Entry
and exit by firms determines the long-run number of firms in a market. In
the long run, each firm decides whether to enter or exit depending on
whether it can make a long run profit: A firm enters the market if it can
make a long run profit, π >0 A firm exits the market to avoid a long run
loss, π < 0. If firms in a market are making zero long-run profit, they are
indifferent between staying in the market and exiting.
6. What is the impact of an increase in the diesel tax on the equilibrium of
the market?
each firm’s MC, AVC and AC shifts up by τ
each firm’s supply curve shifts up by τ
market supply curve shifts up by τ
new market equilibrium: higher P, lower Q
determine change in individual output q and profit π
Task 9
Learning Goals:
1. What is consumer surplus?
The monetary difference between what a consumer is willing to pay for
the quantity of the good purchased and what the good actually costs is
called consumer surplus (CS. Consumer surplus is a dollar-value measure
of the extra pleasure the consumer receives from the transaction beyond
its price. David’s consumer surplus from each additional magazine is his
marginal willing-ness to pay minus what he pays to obtain the magazine.
Thus, his consumer surplus on the first magazine is his marginal
willingness to pay for that magazine, CS 1, minus his expenditure, E1,
which is area CS 1 = (CS1 + E1) -E1 = $5 -$3 = $2. Because his marginal
willingness to pay for the second magazine is $4,his consumer surplus for
the second magazine is the smaller area CS2 = $1. His marginal
willingness to pay for the third magazine is $3, which equals what he must
pay to obtain it, so his consumer surplus is zero, CS 3 = $0 (and hence not
shown as an area in the figure). He is indifferent between buying and not
buying the third magazine. Thus, an individual’s consumer surplus is the
area under the demand curve and above the market price up to the
quantity the consumer buys.
2. What is producer surplus?
A supplier’s gain from participating in the market is measured by its
producer sur-plus (PS), which is the difference between the amount for
which a good sells and the minimum amount necessary for the seller to
be willing to produce the good. The minimum amount a seller must
receive to be willing to produce is the firm’s avoidable production cost.
Thus, for a particular quantity, a firm’s producer surplus is the difference
between its revenue from selling that quantity and its variable cost of
producing thatquantity.
To determine a competitive firm’s producer surplus, we use its supply
curve: its mar-ginal cost curve above its minimum average variable cost.
The firm’s supply curve in panel a of Figure 9.4 looks like a staircase. The
marginal cost of producing the first unit is MC1 = $1, which is the area
under the marginal cost curve between 0 and 1. The marginal cost of
producing thesecond unit is MC2 = $2, and so on. The variable cost, VC, of
producing four units is the sum of the marginal costs for the first four
units: VC=MC1 +MC2 +MC3 +MC4 =$1+$2+$3+$4=$10. The producer
surplus is closely related to profit. Producer surplus is revenue, R, minus
variable cost, VC: PS = R -VC. Thus, the difference between producer
surplus and profit, PS -π = (R-VC) -(R -VC F) = FPS = R -VC = π -(-F) = (R -
VC -F) + F
