1.
a. What information would be required to determine whether the poultry processing market, which
produces "disassembled bird parts," is (perfectly) competitive? Briefly explain the significance of
whether this market is competitive or not.
For a perfect competitive market, the following key conditions must hold:
• The interaction between many buyers and sellers that are “small” relative to the market.
• Each firm in the market produces a homogeneous (identical) product.
• Buyers and sellers have perfect information.
• No transaction costs.
• Free entry into and exit from the market.
To ascertain whether the "disassembled bird parts" market is perfectly competitive, the market has to
be assessed for the above key conditions.
Information on the market structure is needed to determine whether the poultry processing market is
dominated by a few large firms or many small sellers in the market. To determine the industry
concentration, we need to determine the four-firm concentration ratio and the Herfindahl-Hirschman
Index which are obtained using the sales of the respective firms. For the C4 ratio, a value close to zero
will indicate an industry composed of a very large number of firms which is typical of perfect
competitive markets. For the HHI, A value close to zero indicates that there are many small firms
which is a characteristic of perfectly competitive markets.
The poultry processing firms produce identical products therefore step 2 is already ascertained. The
buyers also have perfect knowledge of the market as they are aware of the prices. Buyers and sellers
are also in the same market and hence no significant transaction costs.
Information on the freedom of entry and exit at will for both buyers and sellers need to be
ascertained. This information can be obtained by checking on the ease of obtaining licenses for sellers
willing to join the poultry processing market.
Significance of determining whether the market is competitive or not is that we are able to determine
the market price of the disassembled body parts through the interaction of demand and supply if the
market is competitive. If the market is perfectly competitive then the market price P=MR since the
firms are price takers and no single firm will have an influence on the price. Another significance of
determining whether the market is competitive or not, is to managers who will shift to other
production techniques such as product differentiation in order to maintain a sustainable advantage in
the long-run in such competitive markets. Also, the performance of the firms in terms of profits will be
different in the short-run and long-run depending on whether the market is competitive or not.
a. Now, assume this market is competitive. Based on this assumption, describe the short-run
equilibrium for both the market and a typical processing firm. Using a graphical or algebraic
approach, interpret and explain the key features of the equilibrium.
Equilibrium in perfect competition
In the short run
, For perfect competitive markets, price is determined by the interaction between buyers and sellers.
Equilibrium price is determined by the intersection of supply and demand curves. The market demand
curve slopes downward, while the perfectly competitive firm’s demand curve is a horizontal line equal
to the equilibrium price of the entire market. The demand curve for an individual firm is thus equal to
the equilibrium price of the market.
In this case, the avian bird flu has caused a decrease in the demand for chicken which has driven
chicken's price down. For the market, the equilibrium price P e will be determined by the intersection
of supply and demand curves and will be the attractive price for firms to charge.
In the short run, some factors of production such as the processing plants are fixed and in order to
maximize the profits, managers must determine the output levels by changing the variable inputs
such that MC=P in order to maximize profits.
The total revenue, R for an individual processing firm is market price, P multiplied by the quantity of
chickens sold, Q. ( R=P*Q). Marginal revenue (MR) is the additional revenue from each unit of chicken
sold and thus MR=P. For the processing firm to maximize profits, it must produce until MR=MC and
choose its output such that P=MC.
a. What information would be required to determine whether the poultry processing market, which
produces "disassembled bird parts," is (perfectly) competitive? Briefly explain the significance of
whether this market is competitive or not.
For a perfect competitive market, the following key conditions must hold:
• The interaction between many buyers and sellers that are “small” relative to the market.
• Each firm in the market produces a homogeneous (identical) product.
• Buyers and sellers have perfect information.
• No transaction costs.
• Free entry into and exit from the market.
To ascertain whether the "disassembled bird parts" market is perfectly competitive, the market has to
be assessed for the above key conditions.
Information on the market structure is needed to determine whether the poultry processing market is
dominated by a few large firms or many small sellers in the market. To determine the industry
concentration, we need to determine the four-firm concentration ratio and the Herfindahl-Hirschman
Index which are obtained using the sales of the respective firms. For the C4 ratio, a value close to zero
will indicate an industry composed of a very large number of firms which is typical of perfect
competitive markets. For the HHI, A value close to zero indicates that there are many small firms
which is a characteristic of perfectly competitive markets.
The poultry processing firms produce identical products therefore step 2 is already ascertained. The
buyers also have perfect knowledge of the market as they are aware of the prices. Buyers and sellers
are also in the same market and hence no significant transaction costs.
Information on the freedom of entry and exit at will for both buyers and sellers need to be
ascertained. This information can be obtained by checking on the ease of obtaining licenses for sellers
willing to join the poultry processing market.
Significance of determining whether the market is competitive or not is that we are able to determine
the market price of the disassembled body parts through the interaction of demand and supply if the
market is competitive. If the market is perfectly competitive then the market price P=MR since the
firms are price takers and no single firm will have an influence on the price. Another significance of
determining whether the market is competitive or not, is to managers who will shift to other
production techniques such as product differentiation in order to maintain a sustainable advantage in
the long-run in such competitive markets. Also, the performance of the firms in terms of profits will be
different in the short-run and long-run depending on whether the market is competitive or not.
a. Now, assume this market is competitive. Based on this assumption, describe the short-run
equilibrium for both the market and a typical processing firm. Using a graphical or algebraic
approach, interpret and explain the key features of the equilibrium.
Equilibrium in perfect competition
In the short run
, For perfect competitive markets, price is determined by the interaction between buyers and sellers.
Equilibrium price is determined by the intersection of supply and demand curves. The market demand
curve slopes downward, while the perfectly competitive firm’s demand curve is a horizontal line equal
to the equilibrium price of the entire market. The demand curve for an individual firm is thus equal to
the equilibrium price of the market.
In this case, the avian bird flu has caused a decrease in the demand for chicken which has driven
chicken's price down. For the market, the equilibrium price P e will be determined by the intersection
of supply and demand curves and will be the attractive price for firms to charge.
In the short run, some factors of production such as the processing plants are fixed and in order to
maximize the profits, managers must determine the output levels by changing the variable inputs
such that MC=P in order to maximize profits.
The total revenue, R for an individual processing firm is market price, P multiplied by the quantity of
chickens sold, Q. ( R=P*Q). Marginal revenue (MR) is the additional revenue from each unit of chicken
sold and thus MR=P. For the processing firm to maximize profits, it must produce until MR=MC and
choose its output such that P=MC.
