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The market for fertilizer is perfectly competitive. Firms in the market are producing output but are currently incurring economic losses.a. How does the price of fertilizer compare to the average total cost, the average variable cost, and themarginal cost of producing fertilizer?b. Draw two graphs, side by side, illustrating the present situation for the typical firm and for themarket.c. Assuming there is no change in either demand or the firms' cost curves, explain what will happenin the long run to the price of fertilizer, marginal cost, average total cost, the quantity supplied byeach firm, and the total quantity supplied to the market.
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Chapter 14
Firms in Competitive Markets
How Markets Work
The Economics of Labor Markets
Firm Behavior and the Organization of Industry
Daniyal K.
May 4, 2020
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The market for fertili…
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Suppose that each firm in …
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Suppose firms become very …
so because we know we're in a perfectly competitive market and that the firms are incurring losses, we know that we are not in the profit range along the marginal cost curve, so that would be anything basically above point A. Also, we know we're not in the shutdown condition because that would be anything below point B. So when a firm is operating along the marginal cost curve below average, total cost but above average variable cost, this is when the firm is operating at a loss. Now, why aren't they just shutting down? Well, because they're better off operating at a loss instead of shutting down, in which case they would have a greater loss. So for Part B, we need to graph side by side. We need to show the firm and the market how they relate to one another. So essentially, this is where we would be again. You can see the price is below average total cost, so we are not making economic profits. Were not even making a counting profits and you know they're for that. The since it's perfectly competitive that we're going to be seeing a flat supply curve, a perfectly elastic supply curve. Why is that? Well, essentially, because if we draw our demand curve on here is well, what happens? An individual firm entering or leaving the market? Increasing or decreasing production is not actually going to budge. That supply curve and any changes in demand will change the quantity without changing the price. Okay, so for part three, what's going to happen in the long run? Well, let's take a look at that. So Number one firms, we're gonna have to leave the market all right, there's too many firms. We know that because it's perfectly competitive and everyone's operating at a loss. As firms leave, what happens? Well, that draws down supply, which will increase the price for fertilizer. Marginal cost is going to increase. An average total cost is going to decrease. Furthermore, the quantity from each firm is going to rise. But how can this be the case here that the quantity from each firm is going to rise and firms are leaving the market right? So the whole reason firms leave the market is because there's too much being produced. So how do we square the circle, so to speak? Well, the reason firms were leaving the market is too much is being produced. The firms that remain are the ones. Sorry, I don't know why that's doing that. The firms that remain are the ones that are going to actually produce more. But overall market quantity is going to fall. Okay, so it's a little complicated. So one more time the firms that remain will produce more than they did before, but overall, the total amount made by the market is going to decline.
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