ECO100: LECTURE #14
EXAMPLE: HOT DOG CONTINUED
The market for hot dog stands is perfectly competitive.
The market price is $3.00.
1) In the long run, will the price remain at $3.00? Will it rise? Will it fall?
Price will remain at $ 3.00 if the representative hot dog stand is earning economic profit. (ie. if P = ATC)
If the representative stand is earning economic profits (P > ATC), then more firms will enter the industry, the market
supply curve will shift right, and the price will fall beneath $3.00.
If the representative stand is suffering from an economic loss (P < ATC), firms will exit the industry, the market
supply curve will shift left, and the price will rise above $3.00.
2) If the city of Toronto increases the annual licensing fee from $500 to $1000, what will happen to the number of hot dog stand?
(Assume, for simplicity, that the representative hot dog stand is earning zero economic profit)
$3.00 C dd
Increase in fixed cost MC does not chance, so representative firm produces unchanged level of output.
However, ATC shifts up to ATC’ and firm is now suffering an economic loss.
Result: Price is unchanged Long Run
Since representative firm is suffering an economic loss, firms exit the industry, the market supply curve shifts left, and price
Firms will continue to exit industry until the price increases to the point where P =ATC’
In the long run, there are fewer firms, but firms that remain produce larger output (q’ > q)
Single seller (of products with no close substitutes)
Barriers to Entry
1) Legal barriers (legal monopoly)
- post office (first class mail)
2) Natural barriers (natural monopoly)
- high fixed costs + low marginal costs
- ATC may continually decline (ie. pipeline)
- implication: efficient to have only one firm
- public policy: regulate the single firm Ex. the toll road (Highway 407) north of Toronto is a monopoly
(If you want to avoid traffic congestion on the public highway, the 401, Highway 407 is the only alternative)
Can the owners of Highway 407:
1) Set the highest possible price?
2) Earn unlimited profits? For a monopolist:
1) Market DD = Firm DD (the individual firm represents the market)
2) Market DD