Session 

3
Competitive Equilibrium – Fishing

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 1

Preliminaries
• TA problem‐solving session this week (8/31)
• Problem posted in Canvas/Files/TA Problem Session 2 
• Solve this problem before the review session and come with 
questions
• Heterogeneous firms version…good intuition building for Alusaf!
• Midterm end of next week
• Sample problems and solutions posted in Canvas/Files/Midterm 
Practice Exams
• Faculty review session next week
• Review session problem posted in Canvas/Files/Midterm Review 
Session
• Solve this problem before the review session!

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 2

 Upcoming Sessions

• General Maritime Case
• Externalities
• Alusaf case – student presentations
• Every group submits one Power Point presentation
• 2 groups present in each section
• Details in the syllabus and on Canvas

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 3

Today’s Goals

• Recap LR equilibrium from last session
• Analyze the Fishing Case:  application of 
theory from last session

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 4

 Long‐Run Equilibrium

• What is the long‐run equilibrium price in 
competitive industries?
•
• “Natural price”
• Forces drive us toward this price 

• No profits??

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 5

Long‐Run Equilibrium

• Homogeneous firms

• Heterogeneous firms

• Examples of competitive industries : 

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 6

 Fishing Problem

• What is the market?  

• Is it competitive?

,
• Initial demand: 𝑃

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 7

Fishing Problem, Day ‐1

• Captain’s Income Statement:

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 8

 Fishing Problem, Day ‐1
Capt's opp.
Assumptions cost 1000 $/day

Demand (p*Q) = 400000 Crew wage 400 $/day

Trawler rent 200 $/day # of trawlers 125

1 2 3 4 5 6 7 8
Average Average Average
Quantity per Variable Fixed Variable Total Marginal Fixed Variable Total Total Price that
Industry clears
Trawler Input Cost Cost Cost Cost Cost Cost Cost Supply market
(deckhan
(lbs. of fish) ds) ($) ($) ($) ($/lb.) ($/lb.) ($/lb.) ($/lb.) (lbs.) ($/lb.)
1000 1 1200 400 1600 1.200 0.400 1.600 125,000 3.20
3500 2 1200 800 2000 0.160 0.343 0.229 0.571 437,500 0.91
5500 3 1200 1200 2400 0.200 0.218 0.218 0.436 687,500 0.58
7000 4 1200 1600 2800 0.267 0.171 0.229 0.400 875,000 0.46
8000 5 1200 2000 3200 0.400 0.150 0.250 0.400 1,000,000 0.40
8600 6 1200 2400 3600 0.667 0.140 0.279 0.419 1,075,000 0.37
9100 7 1200 2800 4000 0.800 0.132 0.308 0.440 1,137,500 0.35
9500 8 1200 3200 4400 1.000 0.126 0.337 0.463 1,187,500 0.34
9800 9 1200 3600 4800 1.333 0.122 0.367 0.490 1,225,000 0.33
10000 10 1200 4000 5200 2.000 0.120 0.400 0.520 1,250,000 0.32
10190 11 1200 4400 5600 2.105 0.118 0.432 0.550 1,273,750 0.31
10370 12 1200 4800 6000 2.222 0.116 0.463 0.579 1,296,250 0.31
10540 13 1200 5200 6400 2.353 0.114 0.493 0.607 1,317,500 0.30
10700 14 1200 5600 6800 2.500 0.112 0.523 0.636 1,337,500 0.30
10850 15 1200 6000 7200 2.667 0.111 0.553 0.664 1,356,250 0.29

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 9

Production Function for Fish

$
lbs of  Output of fish Cost function
fish
Marginal 
Cost

Number of  lbs of 

deckhands fish

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 10

 Fishing Problem, Day ‐1

$ $
Boat Industry

q Q

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 11

Fishing Problem, Day +1

• Virus in Chile ‐> Change in demand for wild 
, ,
Alaskan salmon, new demand: 𝑝
• 1 million pounds caught ‐ what price clears 
the market?

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 12

 Fishing Problem, Day +1

$ $
Boat Industry

q Q

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 13

Fishing Problem, Day +1

• Captain’s Income Statement:

Day ‐1 Day +1
Revenue
Expenses
Crew
Rent 
Captain's Opportunity Cost

Economic Profit 

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 14

 Fishing Problem, Day +1
Capt's opp.
Assumptions cost 1000 $/day

Demand (p*Q) = 2500000 Crew wage 400 $/day

Trawler rent 200 $/day # of trawlers 125

1 2 3 4 5 6 7 8
Variabl Avg.
Quantity per e Fixed Variable Total Marginal Avg. Fixed Variable Avg. Total Total Price that
Industry clears
Trawler Input Cost Cost Cost Cost Cost Cost Cost Supply market
(deckh
(lbs. of fish) ands) ($) ($) ($) ($/lb.) ($/lb.) ($/lb.) ($/lb.) (lbs.) ($/lb.)
1000 1 1200 400 1600 1.200 0.400 1.600 125,000 20.00
3500 2 1200 800 2000 0.160 0.343 0.229 0.571 437,500 5.71
5500 3 1200 1200 2400 0.200 0.218 0.218 0.436 687,500 3.64
7000 4 1200 1600 2800 0.267 0.171 0.229 0.400 875,000 2.86
8000 5 1200 2000 3200 0.400 0.150 0.250 0.400 1,000,000 2.50
8600 6 1200 2400 3600 0.667 0.140 0.279 0.419 1,075,000 2.33
9100 7 1200 2800 4000 0.800 0.132 0.308 0.440 1,137,500 2.20
9500 8 1200 3200 4400 1.000 0.126 0.337 0.463 1,187,500 2.11
9800 9 1200 3600 4800 1.333 0.122 0.367 0.490 1,225,000 2.04
10000 10 1200 4000 5200 2.000 0.120 0.400 0.520 1,250,000 2.00
10190 11 1200 4400 5600 2.105 0.118 0.432 0.550 1,273,750 1.96
10370 12 1200 4800 6000 2.222 0.116 0.463 0.579 1,296,250 1.93
10540 13 1200 5200 6400 2.353 0.114 0.493 0.607 1,317,500 1.90
10700 14 1200 5600 6800 2.500 0.112 0.523 0.636 1,337,500 1.87
10850 15 1200 6000 7200 2.667 0.111 0.553 0.664 1,356,250 1.84
Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 15

Fishing Problem, Day +8
Capt's opp.
Assumptions cost 1000 $/day

Demand (p*Q) = 2500000 Crew wage 400 $/day

Trawler rent 200 $/day # of trawlers 125

1 2 3 4 5 6 7 8
Variabl Avg.
Quantity per e Fixed Variable Total Marginal Avg. Fixed Variable Avg. Total Total Price that
Industry clears
Trawler Input Cost Cost Cost Cost Cost Cost Cost Supply market
(deckh
(lbs. of fish) ands) ($) ($) ($) ($/lb.) ($/lb.) ($/lb.) ($/lb.) (lbs.) ($/lb.)
1000 1 1200 400 1600 1.200 0.400 1.600 125,000 20.00
3500 2 1200 800 2000 0.160 0.343 0.229 0.571 437,500 5.71
5500 3 1200 1200 2400 0.200 0.218 0.218 0.436 687,500 3.64
7000 4 1200 1600 2800 0.267 0.171 0.229 0.400 875,000 2.86
8000 5 1200 2000 3200 0.400 0.150 0.250 0.400 1,000,000 2.50
8600 6 1200 2400 3600 0.667 0.140 0.279 0.419 1,075,000 2.33
9100 7 1200 2800 4000 0.800 0.132 0.308 0.440 1,137,500 2.20
9500 8 1200 3200 4400 1.000 0.126 0.337 0.463 1,187,500 2.11
9800 9 1200 3600 4800 1.333 0.122 0.367 0.490 1,225,000 2.04
10000 10 1200 4000 5200 2.000 0.120 0.400 0.520 1,250,000 2.00
10190 11 1200 4400 5600 2.105 0.118 0.432 0.550 1,273,750 1.96
10370 12 1200 4800 6000 2.222 0.116 0.463 0.579 1,296,250 1.93
10540 13 1200 5200 6400 2.353 0.114 0.493 0.607 1,317,500 1.90
10700 14 1200 5600 6800 2.500 0.112 0.523 0.636 1,337,500 1.87
10850 15 1200 6000 7200 2.667 0.111 0.553 0.664 1,356,250 1.84
Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 16
 Fishing Problem, Day +8

$ $
Boat Industry

q Q

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 17

Fishing Problem, Day +8

• Captain’s Income Statement:

Day ‐1 Day +1 Day +8

Revenue
Expenses
Crew
Rent 
Captain's Opportunity Cost

Economic Profit 

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 18

 Fishing Problem, Day +30
• What do we expect after one month?
• Captain’s Income Statement:
Day ‐1 Day +1 Day +8 Day +30
Revenue
Expenses
Crew
Rent 
Captain's OC

Economic Profit 

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 19

Fishing Problem, Day +30

$ $
Boat Industry

q Q

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 20

 Fishing Problem, Day +365

• What do we expect after one year?

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 21

Fishing Problem, Day +365
Assumptions Capt's opp. cost 1000 $/day
Demand (p*Q) = 2500000 Crew wage 400 $/day
Trawler rent 200 $/day # of trawlers 781.25

1 2 3 4 5 6 7 8
Quantity per Variable Fixed Variable Total Marginal Avg. Fixed Avg. Variable Avg. Total Total Price that

Trawler Input Cost Cost Cost Cost Cost Cost Cost Industry Supply clears market
(deckhand
(lbs. of fish) s) ($) ($) ($) ($/lb.) ($/lb.) ($/lb.) ($/lb.) (lbs.) ($/lb.)
1000 1 1200 400 1600 1.200 0.400 1.600 781,250 3.20
3500 2 1200 800 2000 0.160 0.343 0.229 0.571 2,734,375 0.91
5500 3 1200 1200 2400 0.200 0.218 0.218 0.436 4,296,875 0.58
7000 4 1200 1600 2800 0.267 0.171 0.229 0.400 5,468,750 0.46
8000 5 1200 2000 3200 0.400 0.150 0.250 0.400 6,250,000 0.40
8600 6 1200 2400 3600 0.667 0.140 0.279 0.419 6,718,750 0.37
9100 7 1200 2800 4000 0.800 0.132 0.308 0.440 7,109,375 0.35
9500 8 1200 3200 4400 1.000 0.126 0.337 0.463 7,421,875 0.34
9800 9 1200 3600 4800 1.333 0.122 0.367 0.490 7,656,250 0.33
10000 10 1200 4000 5200 2.000 0.120 0.400 0.520 7,812,500 0.32
10190 11 1200 4400 5600 2.105 0.118 0.432 0.550 7,960,938 0.31
10370 12 1200 4800 6000 2.222 0.116 0.463 0.579 8,101,563 0.31
10540 13 1200 5200 6400 2.353 0.114 0.493 0.607 8,234,375 0.30
10700 14 1200 5600 6800 2.500 0.112 0.523 0.636 8,359,375 0.30
10850 15 1200 6000 7200 2.667 0.111 0.553 0.664 8,476,563 0.29

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 22

 Fishing Problem, Day +365

$ $
Boat Industry

q Q

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 23

What is ManEc?
• Economic agents optimize
• Optimizing agents interact in markets
• These actions and interactions create market forces

• Market forces push towards an equilibrium
• Equilibrium is a concept that helps us predict how markets behave
• Equilibrium provides a benchmark from which we can consider deviations
• Shocks push markets out of equilibrium

• Market structure governs how market forces will play out
• Perfect Competition to Monopoly

Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 24

 Key Concepts
• Prices send SIGNALS to the market that help lead to 
optimal allocation of resources

• Adjustments in phases:
• Immediate run:  S = D and market clears
• Short‐run: p = MC to maximize profit
• Long‐run: entry/exit until no incentive to do so

• Natural price for an industry:  p = min(ATC)
• Zero economic profit for all if identical costs
• Zero economic profit for “marginal firm” if costs differ

• Economic profits to those that control scarce resources!
Competitive Equilibrium ‐ Fishing Managerial Economics – Profs. Fort & Montag Page 25