Economics Assignment

This document provides answers to various questions related to economics, including perfect competition, monopolies, oligopolies, and different types of goods. It explains the concepts and provides diagrams to illustrate the concepts. The document also discusses the long-run equilibrium conditions of different market structures.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 1:...................................................................................................................................2
a..............................................................................................................................................2
b..............................................................................................................................................3
Answer 2:...................................................................................................................................4
a..............................................................................................................................................4
b..............................................................................................................................................5
Answer 3:...................................................................................................................................7
a..............................................................................................................................................7
b..............................................................................................................................................7
c..............................................................................................................................................8
d..............................................................................................................................................9
Answer 4..................................................................................................................................10
a............................................................................................................................................10
b............................................................................................................................................10
References:...............................................................................................................................11

2ECONOMICS ASSIGNMENT
S
D
D1
Price Price
P
O
Output Output
Market Price taker firm
Q
Answer 1:
a.
Firms, in a market of perfect competition, are price taker as they cannot change the
price of products. This happens as each firm possesses a very small portion of the entire
market. The number of firms is very large as new one can enter into the market easily without
any restriction. Moreover, existing firms can also exit from the market if they incur loss
(Bhattacharya, Robotis & Van Wassenhove, 2019). Based on the characteristics of a perfectly
competitive market, each firm as well as buyer has perfect knowledge regarding the price and
corresponding amount of output, selling in market. Therefore, a small change in price by a
firm can influence other firms to change their prices accordingly. Therefore, no firm intends
to change price level (Cowell, 2018). As a result, the market receives a stable condition
where no firm can change price as per its requirement. This price taking condition can be
described with the help of following diagram.

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Output
AC
E
Market Firm
Price Price
O
Output
P0
P1
C
Q1Q0
D
S1
S2
MC
MR1
MR0
Figure 1: Price taking condition in a perfectly competitive market
In figure 1, S represents the market supply curve considering all existing firms while
D represents the market demand curve. Both curves intersect with each other and from this an
equilibrium price as well as output has been generated. This price cannot be changed in
market and consequently they have achieved this price to set the individual demand curve. As
a result, the demand curve of every firm looks like a horizontal straight line.
b.
In a perfectly competitive market, one firm can incur loss or earn economic profit
during short-run. However, firms earn only normal profit during long-run. This phenomenon
can be described with the help of some features of this type of market. The entry and exist in
this market is not restricted. Therefore, new firms can enter into this market if the existing
firms enjoy economic profits during short-run (Currie, Peel & Peters, 2016). On the other
side, existing firms have flexibility to leave the market if they incur loss during short-run.
Therefore, short-run conditions of these firms lead a perfectly competitive market to
experience normal profit during long-run.

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Figure 2: Short-run and long-run condition of a perfectly competitive firm
The condition of both short-run and long-run is represented in the above figure.
Initially, the market price was P1 and corresponding amount of output was Q0. In this
situation, some firms incur loss by CP0 amount. As a result these firms decide to reduce their
supply of products in market. Moreover, some firms also leave the market as they cannot
continue production process. This in turn leads the market supply curve to shift upward from
S0 to S1 at the same price level. This shifting happens until the price level becomes P1 where
a firm earns normal profit only (Lunn, 2015). However, this entry and exit of new firms take
some times and this tends the market to enter in long-run. Hence, from this it can be said that
a perfectly competitive firm earns normal profit only during long run.
Answer 2:
a.
“Natural monopoly” is a situation that occurs when only one firm operates within the
entire industry. This type of monopoly occurs due to higher level of fixed costs. It becomes
impossible to any firm bear such costs without government support. Moreover, insufficient
raw materials, technology or production process also tend a specific market to experience
natural monopoly (Waldman & Jensen, 2016). The firm, which operates in this market, is
called as natural monopolist. If new firms enter into this market then a competition can arise
which further tend production costs and product prices to increase. The following figure
represents a natural monopoly situation containing a decreasing average cost curve as the
firm increases its total production from Q1 to Q2.

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LRAC
Economies of scale
Costs
Output
Q1 Q2
Figure 3: A Natural Monopoly Firm
The above figure represents a situation of natural monopoly. In every level of
production increasing returns to scale occurs. Therefore, the long run average cost (LRAC)
cure decreases. The firm also enjoys economies of scale as its production increases (Lim &
Yurukoglu, 2018). This type of monopoly can be observed in British telecom that controls the
entire telecommunication network across the United Kingdom.
b.
In microeconomics, the concept “efficiency” is essential as it helps an economist to
measure the performance of a market, firm or the entire economy. The term “technical
efficiency” indicates the production capacity of a market when the amount of input is given.
This technical efficiency can be increased if the firm can successfully increase output with its
given inputs, such as limited number of machines, labour or capital accumulation (Latruffe et
al., 2017). Thus, from this it can be said that technical efficiency has a close linkage with

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MR
Costs and revenue of a monopoly firm
Output
AR
O
ATC
MC
P
C
Q
profit maximisation of a firm. This situation can be described with the help of following
diagram.
Figure 4: profit maximisation of a monopoly firm due to technical efficiency
In this above figure, a profit maximising condition of a monopoly firm is represented.
This situation occurs due to technical efficiency. The firm has earned maximises this
efficiency through utilising limited inputs and maximising profit, which is represented by the
difference between price (P) and cost (C).

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Answer 3:
a.
Oligopoly market represents the situation when limited number of firms operates and
similar product of homogenous type. This market has two types, which are collusive and non-
collusive. Mutual interdependency among firms can be observed in this market (Carranza,
Clark & Houde, 2015). This happens as each firm considers reaction of other firms during
implementing price and output policies. Therefore, a firm becomes highly dependent on the
action of rival firms.
This interdependency can be observed in real market as well. The automobile industry
is an example of this type of market, as limited number of firms control the entire industry.
Some well-known car manufacturing companies all over the world are General Motors, Ford
and Chrysler. To set price and corresponding amount of output, a car manufacturing company
can set reaction of other rival firms.
b.
Under an oligopoly market, a rival considers some assumptions based on which it set
responses related to the kinked demand curve. The first assumption addresses a reduction in
price level and its corresponding responses regarding price cut strategy. The second
assumption implies that rival firms do not follow the price increase strategy. This means that
if one firm increases price then rival firms does not intend to follow this strategy. These
assumptions state that each oligopolistic firm tries to protect as well as maintain their
significant market share. To maintain their position in market, each firm follows this
asymmetric strategy related to price change when they experience the kinked demand curve.

8ECONOMICS ASSIGNMENT
MR
Costs and revenue
Output
AR
O
ATCMC
P
C
Q
c.
The long-run equilibrium condition of a monopolistic competitive firm:
Figure 5: Long-run Monopolistic Competitive Market
The above figure represents equilibrium condition of a monopolistic competitive
market during long-run. This firm has the characteristics of both perfect competition market
and monopoly market. For this, new firms can enter or existing firms can exit from the
market. However, each firm operates like a monopolist as products sold by each firm are
close substitute but not the perfect one. Though unlike a monopoly market, a monopolistic
competitive firm can enjoy only normal profit in long-run.

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Price, Costs, Revenue
Output
O
P MR=AR
AC
MC
Q
The long-run equilibrium in a perfectly competitive market
Figure 6: Equilibrium condition of a Perfectly Competitive Market in Long-run
In the above diagram, an equilibrium condition of a perfectly competitive market can
be observed. This condition occurs during long-run when the firm enjoys only normal profit.
Due to flexibility, the existing firm can enjoy economic profit in long run though it
experiences economic profit or incur loss during short-run.
d.
Based on above two diagrams, one can state that whether a monopolistic competitive
firm is superior to a perfectly competitive one or not. During short run, the former firm can
experience excessive amount of economic profit compare to the other one. This is because
the perfectly competitive firm acts as a price taker and charges the price, which is set
automatically in the market (Assenza et al., 2015). On the contrary, the monopolistic firm can
charge any price due to its monopolistic nature. On the contrary, the possibility of incurring

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loss is higher in the monopolistic competitive firm. From this aspect, monopolistic
competitive firm cannot be stated as superior.
Answer 4
a.
Economists classify chiefly three types of goods, which are public goods, private goods and
club goods. The characteristics of public goods are non-rival and non-excludable while
private goods are rivalry and excludable by nature (Iossa & Martimort, 2015). On the
contrary, club products are excludable but non-rival by its nature.
b.
i) According to the given table, the profit maximising level out is 7.
ii) The socially efficient output level is 5 where MSB equates with MSC (Dröes & Koster,
2016).
iii) When the firm increases its production, the marginal pollution costs increase and
consequently generate negative externalities (Friedman, 2017). Therefore, after producing
certain amount of output, the firm starts to generate pollution by significant amount.

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References:
Assenza, T., Grazzini, J., Hommes, C., & Massaro, D. (2015). PQ strategies in monopolistic
competition: Some insights from the lab. Journal of Economic Dynamics and
Control, 50, 62-77.
Bhattacharya, S., Robotis, A., & Van Wassenhove, L. N. (2019). Installed base management
versus selling in monopolistic and competitive environments. European Journal of
Operational Research, 273(2), 596-607.
Carranza, J. E., Clark, R., & Houde, J. F. (2015). Price controls and market structure:
Evidence from gasoline retail markets. The Journal of Industrial Economics, 63(1),
152-198.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Currie, D., Peel, D., & Peters, W. (Eds.). (2016). Microeconomic Analysis (Routledge
Revivals): Essays in Microeconomics and Economic Development. Routledge.
Dröes, M. I., & Koster, H. R. (2016). Renewable energy and negative externalities: The effect
of wind turbines on house prices. Journal of Urban Economics, 96, 121-141.
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University
Press.
Iossa, E., & Martimort, D. (2015). The simple microeconomics of public‐private
partnerships. Journal of Public Economic Theory, 17(1), 4-48.

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Latruffe, L., Bravo-Ureta, B. E., Carpentier, A., Desjeux, Y., & Moreira, V. H. (2017).
Subsidies and technical efficiency in agriculture: Evidence from European dairy
farms. American Journal of Agricultural Economics, 99(3), 783-799.
Lim, C. S., & Yurukoglu, A. (2018). Dynamic natural monopoly regulation: Time
inconsistency, moral hazard, and political environments. Journal of Political
Economy, 126(1), 263-312.
Lunn, P. D. (2015). Are consumer decision-making phenomena a fourth market
failure?. Journal of consumer policy, 38(3), 315-330.
Waldman, D., & Jensen, E. (2016). Industrial organization: theory and practice. Routledge.