Economic Analysis - Assignment Sample

Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
ID number
Name of the Lecturer

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Table of Contents
Perfect Competition (Assumption)..................................................................................................2
Perfect Competition (Profit maximization).....................................................................................2
Part a: Market equilibrium price and quantity.............................................................................2
Part b: Profit maximization of firm.............................................................................................3
Part c: Short run and long run equilibrium..................................................................................4
Part d: Long run equilibrium price and quantity.........................................................................4
Part e: Predicted number of box..................................................................................................6
Perfect competition (shut down point)............................................................................................6
Part a: Zero economic profit........................................................................................................6
Part b: Short run loss under perfect competition.........................................................................7
Part c: Short run supply curve.....................................................................................................7
Monopoly (profit maximization).....................................................................................................8
Part a: Marginal Revenue and profit maximization under monopoly.........................................8
Part b: Short run and long run equilibrium................................................................................10
Part c: Long run situation..........................................................................................................11
Monopolistic Competition (Profit maximization).........................................................................11
Part a: Comparison of monopolistic competition and perfect competition...............................11
Part b: Introduction of new and innovative product..................................................................12
Part c: Flatter demand curve for firm........................................................................................12
Part d: Monopolistic competition and inefficiency...................................................................12
Oligopoly (kinked demand curve).................................................................................................13
Part a: Oligopoly market and kinked demand curve.................................................................13
Part b: Cartel..............................................................................................................................13
Reference list.................................................................................................................................15

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Perfect Competition (Assumption)
Share or stock exchange market is regarded as a god example of perfectly competitive
market because the feature of such markets follow the assumption of perfectly competitive
market. In the share market, there exist very large number of groups. There a numerous buyers,
seller, market makers and public corporation. Buyers in the market are investors making
purchase of shares. The owners of share are the sellers who are willing to sell their share in
exchange of cash. The market is usually large with large number of buyers and sellers with each
having no control over the market. Like perfect competition, buyers and sellers in BP share
market accept the market-determined price (Beveridge 2013). Each share has equal chance of
making profit or loss and is thus identical. This matches the assumption of homogenous good
under perfect competition. Same as perfect competition sellers and buyers have complete
knowledge about the product sold in the market. As the features of BP share market signify
various characteristics competitive market, such market is identified as a perfectly competitive
market.
Perfect Competition (Profit maximization)
Part a: Market equilibrium price and quantity
In the New Zealand egg market, the demand function is given as
P=1000−2 Q
The corresponding market supply function is
P=100+ Q

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Equilibrium is obtained where demand and supply curve meets. Combination of price and output
in equilibrium is determined as
Market Demand=Market Supply
¿ , 1000−2 Q=100+Q
¿ , 3 Q=900
¿ , Q=300
Equilibrium number of eggs in the market is 300.
The equilibrium price in the market can be obtained from putting equilibrium quantity in either
market demand or market supply function (Carbaugh 2016).
Equilibrium price
P=100+ Q
¿ 100+300
¿ $ 400
Part b: Profit maximization of firm
Equation of marginal cost of egg firm owned by Victor is given as MC = 2q + 1.
Profit maximization condition of a single firm under perfect competition is given as
Price=Marginal Cost
¿ , 400=2 q+1
¿ , 399=2 q

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¿ , q=199.5
Total cost( TC)=100+q2+ q
¿ 100+¿
¿ $ 40099.75
Total Revenue (TR )=Price ( P ) ×Quantity ( q )
¿ 400 × 199.5
¿ $ 79800
Profit is total revenue less total cost
Profit=TR−TC
¿ 79800−40099.75
¿ $ 39700.25
Part c: Short run and long run equilibrium
The firm is in short run equilibrium. Under the current scenario, total revenue of Victor’s
firm exceeds total cost yielding a positive economic profit for the firm. It is possible only in short
run equilibrium. In long run, the situation however will change (Frank, Bernanke & Johnston
2013). With higher than economic profit, there will be entry of new firms. This eliminates all the
excess profit and there remain only normal profit.
Part d: Long run equilibrium price and quantity

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In the long run production takes place at the minimum point of average variable cost. Long run
price and quantity thus can be determined from the given average total cost function.
ATC=100+q2 +q
q
¿ 100
q +q+1
In order to minimize average variable cost in the long run, the first order condition is
d ( ATC )
dq =0
¿ ,−100
q2 +1=0
¿ ,−100
q2 =−1
¿ , q2=100
¿ , q=10
Price in the long run
Price= ATCmin
¿ 100+ q2 +q
q
¿ 100+ 100+10
10
¿ 210
10

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¿ $ 21
Under long run,
Total revenue=10 ×21=210
Total cost=100+100+10=210
Profit in the long run falls to zero as total revenue is just enough
Part e: Predicted number of box
Predicted quantity in the long run can be obtained from market demand function.
Q= 1000−P
2
¿ 1000−21
2
¿ 979
2 =489.5
Number of box= 489.5
12
¿ 40.79 41
Perfect competition (shut down point)
Part a: Zero economic profit
One important feature of perfectly competitive market is the firms are allowed to enter or
exit the market by their choice. No restriction is placed on entry or exist of firm. Competitive
firms in the short run can earn a supernormal profit by charging price above the average cost.

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Short run profit however is not sustained in the long run. Supernormal profit in the short run
encourages new entrants in the industry (Gottheil 2013). As number of firm increases in the
industry, the market supply increases. With excess supply, high price cannot be sustained. As a
result, with entry of new firms price starts falling and so is the profit. Long run adjustment
continues until the industry left with only normal or zero economic profit.
Part b: Short run loss under perfect competition
i)
The choice of firms in the short run is subject to position of average variable cost. As firms in the
short run can only change variable factor, the only cost matters is the average variable cost.
When market price is lower than total average cost then firms make. The firm sill might choose
to stay in the market if price is higher than average variable cost (Hirschey & Bentzen 2016).
Under this circumstance, firm though unable to recover total cost of production but is can cover
total variable cost and part of the fixed cost.
ii)
The shutdown point is defined as a point where firm completely closes down its operation as
neither the variable nor the fixed cost can be covered from continuing production. This is the
case when market price is set below the minimum point of average variable cost (Mathur &
Sinitsyn 2013, vol. 31, pp.404-416). As firms are unable to cover any of the cost, it decides to
shut-down plants and leave the industry.
Part c: Short run supply curve

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Figure 1: Competitive firm’s short run supply curve
(Source: as created by Author)
Supply curve of firm depicts the relation between price and quantity produced by the
firm. Competitive firm choses level of output where price equals the price. In the short run,
operation under perfectly competitive market continues until price is above or equal the
minimum average variable cost (Melvin & Boyes 2013). Below this price, output of individual
firm is zero (case described in b.ii). The short run supply curve in the competitive market is thus
represented by the marginal cost curve covering ranges of output associated higher or equal
average variable cost. In between minimum points of average variable and average total cost
firm incur loss but sill continue production.
Monopoly (profit maximization)
Part a: Marginal Revenue and profit maximization under monopoly

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i)
Demand function of the monopoly market
P=1000−2 Q
From the demand function, total revenue function is obtained as
Total Revenue ( TR )=Price× Quantity
¿ ( 1000−2Q ) ×Q
¿ 1000 Q−2 Q2
The marginal revenue captures change in total revenue following per unit change in quantity.
MR= d ( TR )
dQ
¿ 1000−4 Q
Corresponding to different values of output, the marginal revenue is obtained as
0 50 100 150 200 250 300 350 400 450
-800
-600
-400
-200
0
200
400
600
800
1000
1200
Marginal Revenue
Quantity
Marginal Revenue
Figure 2: Marginal revenue curve

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ii)
The condition of profit maximization in the market is given as
MR=MC
From this profit maximizing price is obtained as
1000−4 Q=2Q+1
¿ , 6 Q=999
¿ , Q=166.5
Price ( P )=1000−2 Q
¿ 1000− ( 2×166.5 )
¿ 1000−333
¿ $ 667
Part b: Short run and long run equilibrium
Corresponding to equilibrium price and quantity, total revenue, total cost and profit can be
determined as
Total Cost (TC)=100+Q2 +Q
¿ 100+¿
¿ $ 27988.75
Total Revenue (TR)=P ×Q

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¿ 667 ×166.5
¿ $ 111055.5
Profit=TR−TC
¿ 111055.5−27988.75
¿ $ 83066.75
The above situation describes the short run scenario. The monopoly firm in the short run earn a
profit of $83066.75.
Part c: Long run situation
In long run, due to sufficient time the firm can take decision regarding expansion of the
existing plant. Size of plant in the long run depends on the state of market demand. The
monopolist is the price maker in the market. The monopolist can expand plant up to the LAC
minimum or to operate to the left of LAC minimum or can expand beyond optimal level
(Pindyck & Rubinfeld 2014). The monopoly firm can maintain a positive economic profit in the
long run by adjusting plant size.
Monopolistic Competition (Profit maximization)
Part a: Comparison of monopolistic competition and perfect competition
Monopolistically competitive market has features of both competitive and monopoly
market. The Auckland City’s café market has a large number of seller like that in the perfectly
competitive market. Any new café can be easily opened with no entry barriers. In both for of
market, long run market is characterized as having only normal or zero economic profit. Unlike
perfect competition, each café owner tries to make its coffee different from the rival firms

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(Sloman & Jones 2017). In the long run the monopolistically competitive firms operates with
excess capacity but competitive firms operate at socially efficient point.
Part b: Introduction of new and innovative product
If one firm in the monopolistically competitive market introduces new, improved product
then demand of the new product increases. As firm with new, improved product faces higher
demand the demand for other incumbent firms reduces shifting the demand curve downward
(Pindyck & Rubinfeld 2014). The downward movement of incumbent firms’ demand curve
reduces both equilibrium price and quantity of each of these firms.
Part c: Flatter demand curve for firm
Price elasticity of demand is the main determinant of slope of the demand curve. In a
monopolistically competitive market, numerous firms compete in the market. Demand faced by
each firm in the market is thus highly sensitive to its own price. Small change in price makes a
huge difference on quantity demanded because of high substitutability among the products of
different firms (Carbaugh 2016). Market demand other hand is relatively less elastic as
consumers are less likely to substitute the entire consumption. Faced with a higher elasticity each
firm is flatter as compared to market demand curve.
Part d: Monopolistic competition and inefficiency
In the cereals market, existence of many brands makes the market inefficient in the sense
that each brand owners operate in the market with an excess capacity (Melvin & Boyes 2013).
The cereal market is monopolistically competitive with presence of so many brands. As
monopolistically competitive firm in the long-run operates at a suboptimal range of output,
presence of may brands indicates inefficiency.

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Oligopoly (kinked demand curve)
Part a: Oligopoly market and kinked demand curve
In an oligopoly market, there are small number of large firms. Because of the presence of
a few firms, an interdependence among firm is observed in the market. Firm in the oligopoly
market can sell either homogenous or differentiated product. In case of homogenous product, the
market is called pure oligopoly while market with differentiated product is called differentiated
oligopoly (Beveridge 2013). Firms engage in price or non-price competition. High barriers for
new entrants, group behavior are some other features of oligopoly market.
Price in the oligopoly market remains rigid due to the presence of kinked demand curve
having two different elasticity below and above the kink. The hypothesis of kinked demand
curve as proposed by Paul M. Sweezy (Frank, Bernanke & Johnston 2013). At the existing
market price, there is a kink in the market demand curve. Firms do not have any incentive either
to increase to decrease the market price. When firm raises price then demand falls sharply
because of high elasticity. In contrast, if one firm reduces price then the firm does not gain much
as all other do the same making demand inelastic.
Part b: Cartel
OPEC and CIPEC, both are examples of collusive oligopoly. The two cartel however differs in
their structure. OPEC, presently having 14 member countries is successful in maintaining a high
price at least in the short run. OPEC’s success is mainly derived from inelastic nature of supply
and demand of oil. OPEC having control over a major share of world oil supply is successful is
maintain artificial shortage of oil (Vatter 2017, Vol. 63, pp.272-287). CIPEC, cartel formed with

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copper producing countries failed to raise price in the copper market mainly due to elastic
demand and supply of copper and have control over a relatively small portion of world supply.
The two central condition for successful cartelization thus derived as inelastic demand of
product for which cartel is formed and members of the cartel should have a good control over
global supply (Hirschey & Bentzen 2016). As cartel is not a formal organization its often faces
several organizational problem. Setting a mutually exclusive price arrangement, observing
behavior of the member, unequal division responsibilities are some of the organizational problem
of cartel.

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Reference list
Beveridge, T., 2013. A primer on microeconomics. [New York, N.Y.] (222 East 46th Street, New
York, NY 10017): Business Expert Press.
Carbaugh, R., 2016. Contemporary Economics. Milton: Taylor and Francis.
Frank, R., Bernanke, B. and Johnston, L., 2013. Principles of microeconomics. New York:
McGraw-Hill/Irwin.
Gottheil, F., 2013. Principles of microeconomics. Mason, Ohio: South-Western/Cengage
Learning.
Hirschey, M. and Bentzen, E., 2016. Managerial economics. Andover: Cengage Learning.
Mathur, S. and Sinitsyn, M., 2013. Price promotions in emerging markets. International Journal
of Industrial Organization, 31(5), pp.404-416.
Melvin, M. and Boyes, W., 2013. Principles of microeconomics. [Mason, Ohio?]: South-Western
Cengage Learning.
Pindyck, R. and Rubinfeld, D., 2014. Microeconomics, Global Edition. Harlow, United
Kingdom: Pearson Education Limited.
Sloman, J. and Jones, E., 2017. Essential economics for business. Harlow, England: Pearson.
Vatter, M., 2017. OPEC's kinked demand curve. Energy Economics, 63, pp.272-287.