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

Indepedent trucking is an industry that can be considered perfectly competitive. Market demand curve is negatively sloped. Market supply curve is positively sloped curve. Market demand curve and markey supply curve determine the price level P and quantity Q. Trucking firm is perfectly competitive firm and it is a price taker. It will take the price whatever determine by the market. At this price firm will sell output Q level of output. Firm will maximise output when MR=MC. AR=MR=Demand curve.Firm 's demand curve is horizontal demand curve. Because firm is a price taker. Firm's MC curve cuts MR curve from below. The rising portion of MC curve from rising minimum AVC or AC ( in long run) is the supply curve of firm
Suppose the GDP increases as U. S. manufactures produce more output. As out put increases, market supply curve will shift rightward and it reduces market prices from P to P1 and increases the quantity from Q to Q1
As output increases, industry has to reduce its prices. Fall in market price will also reduce firm's price from P to P1. As a result output of firm has increased from Q to Q1. Because firm must reduce the price, if trucking industry reduces the market price. In long run, price will decrease and output will increase.