Relationship between Short Run Cost and Equilibrium in Perfect Competition and Monopoly

This essay analyzes the relationship between short run cost and equilibrium in perfect competition and monopoly. It also discusses the difference between short run equilibrium situations in these two market structures. Additionally, it defines inflation and evaluates its costs.

Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Analysing the relationship between the short run cost through using table and diagram............1
Evaluating difference between short run equilibrium situation of perfectly competitive firm
and monopolist firm.....................................................................................................................5
Defining the inflation ..................................................................................................................6
Analysing the cost of inflation ....................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Economics concerned with the social science that deals with production, distribution and
consumption of goods and services. It is important form of study that an individual, businesses,
government and facilitates in making choices about how it allocate the resources effectively
(Anderegg and et.al, 2018).
In the UK, the economy is highly developed social market and also market oriented
economy and it is fifth largest national economy in the world. In this essay it is discussed about
the relationship of short run costs and critically examine through table and diagram. It is studied
the difference exist between short run equilibrium situation of perfectly competitive firm in
Monopolist firm. Apart from that it is define the inflation and mentioning the least three sources
and critically evaluate the cost of inflation of the economy is being discussed.
MAIN BODY
Analysing the relationship between the short run cost through using table and diagram
Short run cost contains both fixed and variable cost and in long run there is no fixed cost
and in short run cost price has short term inferences in the manufacturing procedure (Andor and
Fels, 2018). In this concept the short run the quantity of at least one input is fixed and quantities
of other input might be varied. In this period land and machinery remain the same and in this
expansion is done by hiring more labour and increasing capital. In the context of UK company,
the short run means that an output that increases by adding more variable factors that include the
employing the more worker and that increases the buying in more raw materials. There are
certain types of short run cost which is discussed below-
Total Fixed cost- This types of cost that used to remain constant in short period of period
and it does not change with the changes in the level of output. It is sum of shot run explicit fixed
cost and implicit cost that is incurred by entrepreneur. It will show the amount even when there
is no production in the company as they will occurred even when there is none activity in the
output. These cost are also known as supplementary cost, indirect cost, overhead cost, historical
cost. Therefore their slope of TFC Curve is horizontal straight line. This curve is horizontal to x-
axis and it can be seen that TFC remains the constant at all levels with the change in output.

Total variable cost- This cost changes with the changes in the level of production and
cost is directly proportional to the output of the given firm. TVC is also increasing when output
decreases and then TVC is decrease as well (Banzhaf, Ma and Timmins, 2019). This is helps the
managers to estimate future sales, future cost and helps in forecasting the production plan. This
is important to distinguish the fixed cost and variable cost that is essential to make appropriate
cost estimates.
Total cost- This cost is combination of total fixed cost and total variable cost and this
also changes in the level of output likewise with TVC. This need to be noted that TVC and TC
increase initially at decreasing rate and after they increase at increasing rate (Zhang and et.al,
2018). In this decreasing rate shows that rate at which cost increases when output is less. This
helps in improving the overall planning for the management and also leads in improving the
strategic decision in the organisation.

Average fixed cost- This is fixed cost that does not change with the variation in the
number of goods and services manufactured by company. This is fixed cost per unit which is
calculated by dividing the total fixed cost in the output level (Baumers, and Holweg, 2019). This
is short run as no cost is fixed for long period of time. When unit produces increases, the AFC
per unit decrease. It is shown as declining curve and never touch the horizontal axis and reason
that fixed cost is will never be zero. This is also called as rectangular hyperbola and that
represent that total fixed cost remains same at all level irrespective of change in output.
Average variable cost- This refers to the price of goods that will be higher than average
variable cost of the good. If an company is selling its products for lower than the average
variable cost then the motive of firm that it wants to maximise its profit. The average variable
cost curve is U- Shaped it means that it declines initially and then rises. This is important

because it helps in deciding the whether it should continue their operation in short run and it will
be profitable for the company when marginal revenue is more than average variable cost.
Average cost- This cost is per unit cost of production that is divided by total cost by total
output (Castillo-Vergara, Alvarez-Marin and Placencio-Hidalgo, 2018). This is also called as per
unit total cost and it is greatly influenced by time period of production such as increasing or
expanding the production in the short run.
Marginal cost- This represent the incremental cost that incurred when producing
additional units of goods and services and it is calculated by taking the total change in the cost of
producing more goods which is divided by variation of goods that produced (Thaler, 2018). This
is U- shaped curve as marginal cost initially decrease as output increase and after it rises when
output increases. This is useful for the management in taking decision that whether they need to
buy or manufactured a product and facilitates in production planning at ever level of output.

Evaluating difference between short run equilibrium situation of perfectly competitive firm and
monopolist firm
Perfect competition refers to the situation of firm when they cannot change the price of
product by changing the quantity of its output (Christensen and Miguel, 2018). So, the firm can
alter the quantity without changing the price of product and firm is in equilibrium when it profit
maximise. When it comes to perfect competition there are some assumptions in short run that the
price of product is provided by firm and can sell at any quantity at available price. The size of
firm is constant and firm faces short term curves. In the perfect competition, the firm cannot
avoid fixed cost, even when production is zero the cost will occur. Firm produces as long as its
average price equals or exceed its average variable cost. In this competition, there are three
possibilities in short-run such as normal profit, super-normal profit and loss. In the case of
equilibrium, if average cost is equal to average revenue , then it will earn normal profit. In the
condition of loss, average cost is greater than average revenue then firm (Spash, 2020). In the
case of super normal profit, the average cost is less than average revenue than it is incurring this
situation.
In competitive market, the goal of firm is to achieve the goal to earn more profit and at
the time of profit maximisation the firm is at equilibrium point. In the short run, the firm enhance
the quantity produces of output by increase the use of variable inputs. This is the reason when
short-run and long-run cost is not same and that create the situation in different manner.
Monopolist competition is imperfect competition and describe the common market
structure where there are many competitors but each one sells a slightly different product. In this
small businesses operate under the condition of monopolist competition and that include certain
enterprises such big restaurants and high-end stores. They are independent to take the decision

about the price and output and in this firm the knowledge in widely spread. In this situation of
short run equilibrium super-normal profit, normal profit and losses are possible because there is
loss barriers to entry and also having good knowledge. In the context of monopolist market the
need to be noted that marginal cost should be equal to the marginal cost and in short run, this
shows the maximisation in profit (El-Emam and Özcan, 2019). Under this competition, the
revenue curve is downward sloping because to sell more product, they tend to decrease their
prices. In short run, new firms not able to enter into the group and so that they cannot compete
super-normal profit in the firm.
Defining the inflation
Inflation refers to increasing in price level and decrease in the purchasing power of buyer
and that leads inefficiency in the economy. In the UK, this is also creates the problem among the
consumers as prices were rising and that reduces their saving capacity. This overall impact
negatively as this increases the imbalance between demand and supply in the country through
many reasons.
This reasons of inflation is Demand pull inflation in the UK, in the 1980s the UK
experiences rapid economic and through that government cut interest rate and cut taxes and
because of that house price rose up and that enhancing the positive wealth effect. This increases
the confidence and higher spending and lowering savings and that increase the borrowing. As,
result firm rise in inflation as they could not meet the demand and led in current deficit (Griffin,
Shockley and Mark, 2018). This is the reason of demand-pull inflation and this situation occur in
the case of Brexit issue in the country.
The second reason is falling in the sterling exchange rate that happens after the issue of
Brexit issue in the UK. In this, it effect the weaker section of consumer in the UK and it showed
that sterling exchange rate depreciated by 10% after 2016 (Margo, 2018). This is tense situation
in the UK as they do not have option to avoid this problem and this goes so longer time period.
This also increases the declining in the productivity and lower down the economic growth of the
UK. Many people in the country facing the problem of lacking of saving capacity and reduces
their borrowing power. Prices of all basics product increases and because of that it impact the
living standard of weaker section. Many changes has been made by the government to overcome
the problem of inflation rate.

Third reason of inflation rate in the UK is concerned with the higher prices in import as
this is states that imported goods and services will increase in process if exchange rate
depreciate. This also leads in increasing in the inflation rate as it firstly impact the businesses and
infrastructure of economy of UK. Through this, the company is not able to produces the product
at large level and that also reduces their inefficiency in the management. It somewhere als
negatively influence the consumer and reduces their purchasing power (Lee, Miguel and
Wolfram, 2020). To control this situation organisation has build up the some measurable action
that gives positive effect on the economy.
Analysing the cost of inflation
There are certain inflation cost are leads to lower down the investment capacity and
reduces the economic growth and also fall in the value their savings, This create imbalance in the
situation of economy and destroy confidence in the system. Some of the inflation cost are
Reduced international competitiveness, this country has relatively higher inflation rate
than trading partners. This create the export will become less competitive and decreases the
current account of UK. This is more important to concentrate on increasing in competitive
strength in the economy.
Confusion and uncertainty When there s increasing in the inflation then people where
confused about the where they need to spend their money. In the UK, if inflation is high than the
chances of firm has reduces in terms of investment and create the uncertainty about the future
prices, profits and cost. This also decreases the growth of economy of the UK and decreases the
purchasing power of costumer.
Income redistribution is another cost of inflation that make borrower better off and
decrease the stability of lender more worse as this tends to reduce the value in savings. Many
times savings are in the form of cash at bank and that decrease the low interest rate. In the UK,
the inflation impact the older people more as they were rely more on the savings, High rate
inflation reduce the real value and real income (Lybbert and Wydick, 2018). This influence the
working condition of many people has they were not able to fulfil their better standard of living.
Falling real incomes is termed as cost of inflation as this reduces the wages and pay
restraints has been experienced by UK. As in the period of 2010-2017 this has developed major
problem with the public sector workers an wages were limited by 1% . Through this, it observed

that real fall in wages has impacted directly on workers and from which their life will going to
effect badly as they were highly dependable on their wages pay.
CONCLUSION
From the above essay it is concluded that economics is kind of study from that people
allocate scarce resources for production, distribution and consumption. There are two types of
economics micro and macro and both were concerned with efficiency in the production and
exchange and examine overall situation of country. In this report some short run cost such as
Total cost, Total Variable cost, Total fixed cost, Average cost, Marginal cost, Average fixed cost
has been critically examined and their relationship. It is evaluated the difference between the
short run equilibrium in monopolist and perfect competition and evaluate the many ways that
could be use in short run. Some certain reason of inflation rate such as Demand pull inflation,
Falling in the sterling exchange rate and increase in import prices is being studied and analysing
cost of inflation such as Reduced international competitiveness,Confusion and uncertainty,
Income redistribution and Falling real incomes.

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