Question

Independent trucking (i.e. large semi trucks) is an industry that can be considered perfectly competitive. Suppose that U.S. manufacturers produce less output. What impact will this have on the independent trucking industry in the short run, in terms of the market price, output of an individual firm, and market equilibrium quantity? Explain your reasoning. What impact will the increase in manufacturing output have in the long run? Explain your reasoning.

Answer 1

Part 1) If the US manufacturers start to produce less output, then the demand for independent trucking will decline.

In the short run, market price in the independent trucking will decline due to reduced demand. Decline in market price will cause the output of individual firm as well as equilibrium quantity in the independent trucking market to decline in the short-run.

All this happens because demand for independent trucking is derived demand that depends on the manufacturing sector of the US. Decline in manufacturing sector will reduce demand, price and output in the independent trucking industry.

Part 2) If the output in the manufacturing sector of the US increases, then in the long-run firms in the independent trucking industry will earn normal profit.

Reason being that increased output in the manufacturing sector will result in increased demand in the independent trucking industry. This will cause price in the independent trucking industry to increase. Increased price will result in firms in the independent trucking industry earning super-normal profit.

As it is mentioned that the independent trucking industry is perfectly competitive, so the super-normal profit will attract new firms in the industry.

Entry of new firms will cause the output to increase in the industry, and at the same time increased demand for inputs in the independent trucking industry will cause the cost in the industry to increase. The increased cost and reduced price due to output expansion in the independent trucking industry will ensure that in the long-run firms only earn normal profit.