Question

Independent trucking is an industry that can be considered perfectly competitive. Draw a graph showing market supply, market demand, and equilibrium price and quantity. Draw a corresponding graph for the individual firm/trucker using the market equilibrium price and marginal cost curve. If you line up the two graphs horizontally, the equilibrium price should be the same on both graphs.

Now suppose that GDP increases as U.S. manufacturers produce more 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? Show graphically and explain your reasoning.

Answer 1

As shown in the diagram below, at price p1, both industry and firm is producing. This is a condition of normal profits. It also shows that a firm is producing at minimum average total costs. This is happening as firm is in perfectly competitive market. Average revenue (AR) is also equal to marginal revenue(MR) which is equal to price p1. Profit is maximised when AR=MR. This occurred at price P1.

When GDP is going up then there will be more demand for trucks and as demand curve shifts right firms will have abnormal profits. This is possible as price increases from p1 to p2 whereas average total cost(ATC) remains same. As price charged is more than ATC firms will have abnormal profits. This happens in the short run.

In the long run, more firms may enter as there is easy entry in perfectly competitive market. This shifts supply curve to right and again prices will come to p1 and firms will have normal profits again.

However, exact change in prices to p1 can be different depending on number of firms entering.