9781118041581

FIGURE 7.7

A Competitive Day-

Care Market

The competitive price

($2.50) and output

(9.5 million hours) are

determined by the

intersection of the

supply and demand

curves.

To complete the description of the market, let’s consider the supply of day

care. A day-care supply curve is shown in Figure 7.7. Notice that the main part

of the supply curve is provided by low-cost suppliers at $2.50 per hour. Let’s say

these suppliers enjoy significant economies of scale while maintaining quality

day care. In fact, as we shall see, “grandmotherly” day care at $4 per hour will

become a thing of the past. Less efficient, high-cost grandmothers will be

priced out of the day-care market.

Now we are ready to take a closer look at market efficiency. To begin, we

know that, in a competitive day-care market, the intersection of supply and

demand determines price and quantity. In Figure 7.7, the competitive price is

$2.50 and quantity is 9.5 million hours per week. Now we can make our key

point: This competitive outcome is efficient; that is, it delivers the maximum total dol-

lar benefit to consumers and producers together. This is particularly easy to see in

300 Chapter 7 Perfect Competition

12

8

10

4

2 4 6 8 10 12

Q

Hours of Day Care (Millions)

Hourly Price

2

6

Equilibrium:

PC = $2.50

QC = 9.5 million hours

PC = 2.50

14

9.5

“Store-bought” day care

$4

Grandmothers’

day-care

supply

Regional day-

care demand

$14

0

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