A Model of Manufacturers and Buyers of Cars Over the Business Cycle Illustrating Competitive Manufacturing: Advanced Study

Abstract

I illustrate competitive manufacturing with a simple numerical model of manufacturers and buyers of cars over a business cycle with off-peak and peak demand periods. My model has two types of plants manufacturing cars, plant _K and plant_L , each having linear total costs with absolute capacity limits. Plant _K operates with low VC and high FC. Plant_K , because of its low VC, produces continuously at capacity in off-peak and in peak periods. Plant_L , 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 Plants_K and Plants_L . The signi?cance is to show a positive aspect of Plants_L, its output-rate ?exibility, 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 signi?cance is to show the importance of increasing consumer purchases in peak periods. These two propositions are intuitive and common sense.