Suppose a new hormone shot is developed at Texas A&M University that allows all ranchers to cut their feed costs by 27 percent if they use this shot.
a.Graphically illustrate the short-run implications of this development in the ranching industry. b.Graphically illustrate the long-run implications of this development in the ranching industry.
I'm not sure whether only the supply will shift or the ATC and AVC curves also. Here's a link to the types of graphs we're supposed to draw:
Thanks :)
Answers (1)
Hi,
To some extent I would agree with the answer given by Anjaree, except for the first sentence. The AVC and ATC would NEVER shift to the LEFT!!
Instead, they would tend to shift DOWN. If there are no other variable costs other than the feed, the AVC would shift down by 27%.
The ATC would also shift down by somewhat less because the ATC would include fixed costs and the variable costs.
The ranch's AVC plot would look very much like the marginal cost (MC) line in your example, except it would not be as steep.
The ranch's ATC line would be a little bit similar to the variable cost (VC) in the example, which shows initially the benefits of 'economies of scale', followed by an increasing trend because of 'diminishing returns', except for including the fixed costs.
A. In the short term, if the industry has not yet adapted to the new savings, then:
i. If the price stays the same, the lower costs would permit the firm to realize greater profits at the same output.
ii. If the firm chose to sell MORE because of the lower costs, it could undercut the market price and gain market share.
B. In the long term, the industry supply line would shift down because of the lower costs as all the ranchers take advantage of the lower costs.
The industry ATC and industry AVC lines would also shift down, because the feed costs (a part of variable cost) would be lower by 27%.
It can also be presented as these lines shifting to the right.
To me shifting down or to the right are Equivalent statements because:
i. for a given price, there is more demand, or
ii. for a given demand, the price is lower.
The final result would be a new equilibrium point with a lower price and a larger demand.
I regret that I cannot illustrate this graphically, but I hope you understand what I mean, and can create the graphs yourself.
I was going to reply directly, but my answer was deemed too long. All the best.