econ1101: tutorial 6 week 7

7/30/2019 ECON1101: Tutorial 6 Week 7

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Chapter6PerfectlyCompetitiveSupply:thecostsideofthemarket

Answers to review questions

1 The principle of increasing opportunity cost, also known as the low-hanging-fruit principle, says that the least costly options should be exploited first, withmore costly options taken up only after the least costly ones have beenexhausted. At low prices, only those with low opportunity costs of producing a

product would find it worthwhile to offer it for sale. As prices rise, others withhigher opportunity cost could profitably enter the market. This positiverelationship between a products price and the quantity supplied is shown by anupward-sloping supply curve.

2 Bus fares are determined by the interaction of the market demand for bus ridesand the market supply of bus rides. In a perfectly competitive market, each

individual travellers demand is so small compared to the size of the market thatno single individuals decision has an effect on market demand or on theequilibrium price of a bus ride. Individual bus travellers are price-takers.Similarly, an individual apple growers decision about how much to supply ateach price has no effect on total market supply or on the price of a kilo ofapples. Individual apple growers are also price-takers in the market for apples.

Answers to problems

1 a If the price of a fossil is less than $6, Jo should devote all her time tophoto-

graphy because when the price is, say, $5 per fossil, an hour spent lookingfor fossils will give her 5($5) = $25, or $2 less than shed earn doing

photography. If the price of fossils is $6, Jo should spend one hoursearching, which will supply five fossils and earn Jo revenue of $30; thatis, $3 more than she would earn from photography. However, anadditional hour would yield only four additional fossils or $24 additionalrevenue, so Jo should not spend any further time looking for fossils. If the

price of fossils rises to $7, however, the additional hour gathering fossilswould yield an additional $28; gathering fossils during that hour wouldthen be the best choice, and Jo would therefore supply nine fossils perday. Using this reasoning, we can derive Jos pricequantity supplied

relationship for fossils as follows:

Priceoffossils($) Numberoffossilssuppliedperday

05 0

6 5

7,8 9

913 12


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1426 14

27+ 15

b If we plot these points, we get Jos daily supply curve for fossils:

5 The market supply curve (right) is the horizontal summation of the supplycurves of the individual market participants (left and centre).

Horizontal summation means holding price fixed and adding the correspondingquantities. For example, at a price of $4 per unit, a total of 2 + 2 = 4 units will

be supplied. If you want to derive the market supply curve algebraically, rewriteeach individual supply curve with quantity as the dependent variable and add.

Number of fossils

Price ($/fossil)

67

5

9

9 1214

15

27

14

6

3

P=2Q1

4

P=2+Q2

1

4

2

6 6

4

22

4

4 7221

P

Q

P

Q

P

Q1 2

S


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Pay careful attention to the region for which the supply curves dont overlap(here, the region P2.

Expressed algebraically, the market supply curve is thus:

P = 2Q for P2


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econ1101: tutorial 6 week 7

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