A Model of Manufacturers and Buyers of Cars Over the Business Cycle Illustrating Competitive Manufacturing: Advanced Study | Chapter 3 | Current Strategies in Economics and Management Vol. 2

I illustrate competitive manufacturing with a simple numerical model of manufacturers and buyers of carsoverabusinesscyclewithoff-peakandpeakdemandperiods. Mymodelhastwotypesofplants manufacturing cars, plantK and plantL, each having linear total costs with absolute capacity limits. PlantK operates with low VC and high FC. PlantK, because of its low VC, produces continuously at capacity in off-peak and in peak periods. PlantL, because of its high VC, shut-downs in off-peak periods and produces at capacity in peak periods. I show results under perfect competition SRMC pricing. I prove mathematically two propositions with this model. Proposition I shows mathematically the conditions of investor indifference to choose between PlantsK and PlantsL. The significance is to show a positive aspect of PlantsL, its output-rate flexibility, that some may overlook. Proposition II shows mathematically the conditions that shifting consumption of car purchases from off-peak to peak necessarily adds to consumer surplus. The significance is to show the importance of increasing consumer purchases in peak periods. These two propositions are intuitive and common sense.

Author(s) Details

Gerald Aranoff
Professor of Accounting, Bnei Brak, Israel.

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