Question

In certain industries, firms buy their most important inputs in markets that are close to perfectly competitive and sell their outputs in imperfectly competitive markets. Cite as many examples as you can of these types of businesses. Explain why the profits of such firms tend to increase when there is an excess supple of the inputs, they use in the production process.

Answer 1

Examples of businesses that buy inputs in perfectly competitive markets and sell outputs in imperfectly competitive markets include the commercial aircraft industry and the soft drink industry. These firms' profits increase with an excess supply of inputs due to lower production costs and their ability to maintain higher output prices.

Step-by-step explanation:

In industries where firms buy inputs from markets that are near perfect competition and sell their outputs in imperfectly competitive markets, such as oligopolies or monopolistically competitive markets, we can cite several examples. A primary example is the commercial aircraft industry, dominated by companies like Boeing and Airbus. Another example is the soft drink industry, largely controlled by Coca-Cola and Pepsi.

The profits of these firms tend to increase when there is an excess supply of the inputs they use. This is because, in a perfectly competitive market, an excess supply leads to lower prices for inputs, reducing the firms' production costs. Since these firms face less price competition in their output markets, they can maintain higher prices for their products, leading to greater profit margins.