How Many Gas Stations?
A city initially allowed only one gas station, which pumped 20,000 gallons of gas. A gas station is assumed to reach MES at a quantity of 5,000. Will removing the restriction result in four more gas stations, each producing 5,000 gallons? 1. Entry reduces prices, and thus increases the total quantity demanded. 2. But each firm is likely to be on the negatively-sloped portion of its average-cost curve and is thus likely to produce less than 5,000 units. Suppose that the quantity demanded increases to 24,000, but each station pumps only 4,000 gallons; there will then be a total of six stations.
