After you have studied Economics in the News on pp. 332–333, answer the following questions.

a. What features of the market for fitness services make it competitive?

b. If the decrease in demand for gym membership was expected to be temporary, how would gym operators have acted and what would have happened to the price of a gym membership during the pandemic?

c. How would you expect the development of on-demand fitness classes online to change the market for gym membership in the long run?

d. Illustrate your answer to part

(c) with an appropriate graphical analysis.

Transcribed Image Text:

Before the Covid-19 pandemic changed the fitness in- dustry, 60 million Americans had a gym membership and 40,000 gyms offered services at an average price of $40 a month. Although gyms are not like corn or sweaters and vary in features, equipment, and quality, the market for fitness services is highly competitive and we can use the perfect competition model to explain what is happening in that market. Social restrictions in response to Covid-19 decreased the demand for fitness services and the outlook for gym operators looked bleak. More than one-half of Americans planned to not renew their gym membership and many installed expensive digitally connected fitness equipment in their homes, so the decrease in demand for gym membership appeared to be permanent. Many gym operators saw a future of persistent economic loss, so closed their gyms. Their exit from the market decreased the supply of fitness services. The decrease in demand for fitness services combined with the decrease in supply lowered the number of gym members but had little effect on the price of gym mem- bership. Figure 1 illustrates the market for gym membership. In 2019, the demand for gym membership was Do and the supply was So. The equilibrium price was $40 a month Figure 2 illustrates the cost and revenue curves of an individual gym. With marginal revenue MR, and marginal cost MC, the gym operator maximizes profit by providing services to 1,500 members. In 2019, average total cost on the ATC curve equaled the market price (an assumption), so the market was in long- run equilibrium and gym operators made zero economic profit. In 2020, Covid-19 decreased demand and in Fig. 1, the demand curve shifted leftward to D. With no change in supply, the price of a gym membership would fall to $25 a month (an assumed price). Figure 2 illustrates the outlook for an individual gym. If the price of a membership falls to $25 a month, the gym incurs an economic loss shown by the shaded rectangle. To avoid this economic loss, gyms start to exit. As they exit, the market supply decreases and the supply curve in Fig. 1 shifts leftward to S. In a new long-run equilibrium, 30,000 gym members, one-half the number before the pandemic, buy member- ship at a price of $40 a month. As gyms exit, people look for alternative fitness services. The market for live and on-demand fitness classes online experience an increase in demand, which creates eco- nomic profit, entry, and an increase in supply. Competitive markets allocate resources to their most