Microeconomics: Efficiency and Market Structures

This microeconomics assignment explores concepts of market efficiency, analyzing productive and allocative efficiency. It delves into cost-push inflation with a focus on monetary policy implications. Additionally, the assignment compares monopolies and perfect competitive markets, examining price, output, and innovation incentives under each structure. The solved problems provide clear explanations and step-by-step solutions to aid student understanding.

Running head: ECONOMICS ASSIGNMENT
ECONOMICS ASSIGNMENT
Name of student:
Name of University:
Author note:

1ECONOMICS ASSIGNMENT
Table of Contents
Question 2.............................................................................................................3
Question 4.............................................................................................................4
Question 3.............................................................................................................5
References.............................................................................................................8

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Question 2
Productive efficiency is condition where economy unable to produce any more of one
good without compromising production of another good.
Productive efficiency occurs when output attained by equilibrium is supplied at
minimum average cost. This kind of condition occurs in the long run equilibrium of perfectly
competitive market. Under these circumstances firms operating using high cost units may not
be able to supply the whole industry because the market price falls due to forces of
competition.
Allocative efficiency is a situation of the economy where production represents
consumer preferences. Under this situation every good or service is produced upto the point
where the last unit of production provides a marginal benefit to consumers that is equal to the
marginal cost incurred during production.

3ECONOMICS ASSIGNMENT
MC
AC
AR=MR
Price
Qe Output
Under perfect competition market both in short run and long run , equilibrium is
attained at the point where p=mc and thus this equilibrium point that is reached is called
allocative efficiency. At this price both the consumer surplus and producer surplus is
maximized. Thus in perfectly competitive market Pareto optimum allocation of resources is
achieved . The graphical representation is shown below.
.
Diagram 1: Economic efficiency of Perfect competition
The above diagram shows both productive and allocative efficiency under perfect
competition. Under long run equilibrium P=MC by which allocative efficiency is reached.
P=MC is attained where AC is minimized which shows productive efficiency.

4ECONOMICS ASSIGNMENT
AS1
AS
Price
P1
Real GDP
P0
Q1
AD
Q0
Question 4
The average Consumer price index of first ten months of fiscal year reached 22.35
percent in Pakistan. By following the suggestion that is given by economists prices of
important goods where increased to handle the situation. As a result whole sale price index
increased to 21.99 percent. Thus this situation faced by Pakistan is created by inflation which
is cost push inflation. Cost push inflation is a inflation type which is caused by substantial
increase in the cost of goods and services and this increase take place due to absence of
suitable alternative (Ahmad, Sheikh and Tariq, 2012).
Diagram 2: Cost push inflation
The above diagram shows that aggregate supply curve shifts to left and this indicates
that supply has fallen due to existing inflation, and this fall in supply impacted the price level
by increasing it, previously price was reached at P0 but after the fall in supply price increased
to P1. Real GDP also fall due to fall in supply. This is mainly the outcome of monetary policy
that is taken by the country to handle the problems that is faced by the economy (Matheson
and Stavrev, 2013).

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Question 3
Monopoly market is different from that of perfect competitive market. Monopoly
market is characterized by single seller selling particular commodity, whereas competitive
market is characterized by many sellers selling single commodity (Holmes, Levine and
Schmitz, 2012). Monopoly firms are price makers while competitive firms are price takers.
Monopoly firm’s sets price at point where it is greater than average cost on the other hand
competitive firms set price at point where price is equal to marginal cost. Thus equilibrium of
both the markets is attained under different conditions. Perfect condition shows equilibrium
where MR=MC and MC cuts the MR curve from below. While under monopoly equilibrium
is attained at point where marginal cost is rising, constant or falling (Rios, McConnell, C.R.
and Brue, 2013).
Comparison of price and quantity:
Monopoly price is set at point where it is higher than perfect competition. In long run,
perfect competitive firm’s sets price at point where price is equal to average cost. In
monopoly, price is set at higher point. This is shown in below diagram.

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Diagram 3: Price and quantity
The above diagram shows that under perfect competition price is set at OP1 while
under monopoly market price is set at OP. Under equilibrium, monopoly firms sell ON units
of output but competitive firms sells higher output ON1. Thus the above diagram shows that,
price under monopoly is set higher but the market sells lower units on the other hand
competitive firms sell more units under low price. Perfect competitive firms sell more output
than that of monopoly firms and it can be observed in diagram 3. Now under competitive
market the firms reach equilibrium at M1, AR=MR=AC=MC are equal. On the other hand
monopoly firms reach equilibrium at point M where it shows MC=MR. Thus the equilibrium
output under competitive market is ON1 and under monopoly market output is ON.
Monopoly output thus is lower than competitive firm (Chen and Schwartz, 2013).

7ECONOMICS ASSIGNMENT
References
Ahmad, M.J., Sheikh, M.R. and Tariq, K., 2012. Domestic debt and inflationary effects: An
evidence from Pakistan. International Journal of Humanities and Social Science, 2(18),
pp.256-263.
Chen, Y. and Schwartz, M., 2013. Product innovation incentives: Monopoly vs.
competition. Journal of Economics & Management Strategy, 22(3), pp.513-528.
Holmes, T.J., Levine, D.K. and Schmitz Jr, J.A., 2012. Monopoly and the incentive to
innovate when adoption involves switchover disruptions. American Economic Journal:
Microeconomics, 4(3), pp.1-33.
Matheson, T. and Stavrev, E., 2013. The Great Recession and the inflation puzzle. Economics
Letters, 120(3), pp.468-472.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.