Question

Suppose the market for fresh pork is a competitive market. Initially, it is operating at its long-run competitive equilibrium at a market price of $50. Owing to the spread of COVID-19, many people turn to buying frozen meat once a week rather than fresh pork every day. As a result, the market price of fresh pork reduces to $30. a. With the aid of a pair of market-and-firm diagrams, illustrate how this would affect the equilibrium price and quantity in the fresh pork market and the output of a typical butcher of fresh pork in the short-run. b. Suppose, for the situation in (a), the average cost of a typical butcher of fresh pork is $40, which includes $15 on buying meat from suppliers, $12 on paying rent, $8 on paying hourly wages on staff, and $5 on other costs. Explain whether a typical butcher should shut down in the short run.

Answer 1

a) Market equilibrium price is $50. In diagram, left panel shows the equilibrium of firm and the right panel shows the market equilibrium point. Price is determined according to the market demand and supply of the pork.

Initially, pork price was $50, where long run average total cost (LTC) , Mc and price line meet. Initial equilibrium is at point A. Due to spread of Covid-19 disease, the demand for daily fresh pork has fallen . In the right panel, market demand curve shifts leftward with existing supply of pork in the market. Hence, market price of pork falls to $30 in the short run. Being in a competitive market, butcher of fresh pork has to accept the fallen price.

The diagram is shown below:

b) the average cost of a butcher of fresh pork is $40,

Out of $40, variable costs are $15 ( cost of meat from suppliers) , $8 on paying hourly wages on staff,

and $12 on paying rent, $5 on other costs are regarded as fixed cost. Rent is not dependent on quantity of sale. Butcher has to pay rent irreapective of sales unit. Therefore, it is regarded as fixed cost.

total variable cost = $(15+ 8) = $23

As long as firm can cover its variable costs, it can operate in the short run. When market price is $30, butcher can cover its average variable costs and some of the fixed costs. Hence, butcher can operate in the short run without shutting down because, after the recovery of the economic situation affected by covid-19 disease, demand may surge again to increase market price of pork. In the long run, thus the butcher can be able to make profit again.