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Analysis Of Gasoline Market Equilibrium: Perfect Competition Vs. Monopoly

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    Analysis of Gasoline Market Equilibrium: Perfect Competition vs. Monopoly Suppose that in a city there are 100 identical self - service gasoline stations selling the same type of gasoline. The total daily market demand function for gasoline in the market is QD = 60,000 - 25,000P, where P is expressed in dollars per gallon. The daily market supply curve is QS=25,000P for P>$0.60. (a) Determine algebraically the equilibrium price and quantity of gasoline. (b) Draw a figure showing the market supply curve and the market demand curve for gasoline, and the demand curve and the supply curve of one firm in the market on the assumption that the market is nearly perfectly competitve. (c) Explain whyyour figure of the market and the firm in part (b) is consistent. (d) Suppose that now the market is monopolized (e.g., a cartel is formed that determine the price output as a monopolist would and allocates production equally to each member). Draw a figure showing the monopolist’s equilibrium output and price. (e) How many gasoline stations would the monpolist operate? (f) Can we say that the monopoly leads to a less efficient use of resources that perfect ompetition? What is the amount of the deadweight loss, if any? (a) The equilibrium price (Pe) is determined by solving : QD = QS Then 60000 – 25000P = 25000P then Pe = 60000/50000 = $1.2 Therefore the equilibrium quantity Qe is : Qe = 25000Pe = 30000. (b) We plotted the quantity in function of the price. The green curve is the market demand curve and the red curve is the market supply curve. (c) A movement along the market supply curve means that the supply relationship remains consistent, and a movement along the market demand curve means that the demand relationship remains consistent : therefore the market is consistent. (d) In monopoly the equilibrium price and quantity are determined by setting the marginal revenue equal to the marginal cost.

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