Monopolistic Competition and Oligopoly Firms' Strategies
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In this assignment content, we discuss various concepts in microeconomics, including perfectly competitive market, monopolistic competition, and oligopoly. We also explore the characteristics of each market, such as demand curves, firm behavior, and efficiency. The summary highlights key points from the provided text.
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MICROECONOMIC ANALYSIS
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Question 1: a. In this graph, the point of intersection of demand and supply is the equilibrium price. Approximately the equilibrium comes up to 3400 level of quantity and 17 dollars price. b.The tariff that has been imposed on the radio can increase the producer surplus to the extent of the increase in the amount of quantity supplied in excess of demand. If the producers would increase the amount of quantity supplied to a great extent then they would have to pay more tariff (Friedman, 2017, p.31). c.The government would collect the amount of tariff which is equal to the tariff on one domestic fan and the numbers of fans sold by the producers. The Deadweight loss is the amount of loss of tariff arising out of the improper allocation of resources. d.If the government had used a quota then it would be able to earn tariff revenue on the quota of the sale of domestic fans by a producer (Posner, 2014). Question 2: a.A perfectly competition is a type of competition where there are unlimited buyers and sellers selling products which are completely same with each other (Azevedo & Gottlieb, 2017, p.67). Assumptions A large number of buyers and sellers-In a perfectly competitive market there are a large number of buyers and sellers.
Full knowledge-Each and every buyer and seller have full knowledge regarding the price and nature of the products. Fully homogenous products-Products sold by all the firms are fully same. Free entry and exit-Existing firms can leave the industry and new firms can join the industry at their own will. b.Demand curve in the perfectly competitive market is fully horizontal or perfectly elastic because the products are all same. Besides, buyers have full information (Kirzner, 2015). Suppose a seller increases the price of his product slightly the buyers would immediately move to other sellers.This shows that the firms are price takers. c.In perfect competition, the demand curve of an individual firm is perfectly horizontal. Irrespective of the quantity produced by the firm in a perfectly competitive market, the price is the same, so the price is equal to MR. Question 3: a.The short-run supply curves are perfectly related to the short run marginal cost curves. In short run, the Marginal cost curve cuts the average variable cost curve and the average total cost curve in the middle (Varian, 2014). The point of intersection is expanded and plotted on another graph showing the market supply curve in the short Run. b.The long-run market supply curve is referred to as the sum total of the individual firm's supply curve. This is the degree of response of the short run supply in a market when there is a change in the demand. Figures A and B explain different supply
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curves. Demand curves are shown by D1 and D2 and the supply curves are depicted as S1 and S2. The point whereof the intersection of D1 and S1 shows that the market undergoes an equibrillium of a long run (Varian, 2014). When D1 to D2 increases the market price goes up to P2. The firms in short run earn economic profits. In the long run, there would be the entry of new firms which would tend the short-run market supply change. Picture B shows both the demand and supply curves for the industry. There is an increase in production and level of output. From the Price P1, any increase in demand an increase in demand will cause the market price move to P2. Firms are able to earn economic profits in short run but in long run, there would be new firms coming in and short-run supply moves from S1 to S2. Question 4: a.Chart of Opportunity costs Country SnowCountry Ice Opportunity costs Skis and Snow, BoardsOpportunity costs Skids and Snow Boards Opportunity cost- 10 SkisOpportunity cost 5 Snowboards Country Snow is producing more snowboards so regarding Snowboards, Country Ice has the advantage. Regarding the production of no country is having a comparative advantage because both the countries have produced a similar number of Skis.
As per as absolute advantage is concerned Country Ice gets the advantage of producing more skis as it produces a less number of Snowboards. In case of Boards country, Snow gets the absolute advantage as it produces more skis. b.The results of trade state that the citizens of Country Snow and Country Ice are getting a similar amount of Skis but regarding snowboards, it is seen that the citizens of country Ice are getting less of snowboards (Shapiro, 2016). This is because the number of snowboards produced is more in country Snow and less in country Ice (Kurzbanet al.2013, p.661). Question 5: a.In case of a closed economy, there is no trade conducted with the other countries. So if the CCC land remains a closed economy then the equilibrium price would be considered by the price determined by the amount of quantity demanded by domestic customers and the amount of coffee supplied by CCC land within the domestic territory (Posner, 2014). In this case the equilibrium is the 340 units of coffee and 990 dollars is the price approximately. b.If the status of CCC land is changed from a closed economy to an open economy then the CCC land would import and export coffee because in case of an open economy trade can be conducted with outside economies. Hence CCC land can import and export coffee.
c.When CCC land is in a closed economy the consumer surplus is the difference between the amount which the domestic consumers decide to pay and the actual amount that the domestic consumers have paid. When CCC land is in an open economy the consumer surplus is the difference between the amount which the domestic and foreign consumers decide to pay and the actual amount that the domestic and foreign consumers have paid. No, domestic consumers would not be in favour in opening the trade market because this would increase the supply and if supply increases then a price of coffee of CCC land would also increase (Posner, 2014). d.The tariff needs to be as big as the number of imports. e.In this case, the amount of tariff charged should be equal to the amount of reduction of imports because the reduction in imports can reduce foreign revenue. In such a case the government of CCC land will have to raise tariff similar to that extent in order to reach their revenue maximisation goal. f.The amount of money received from tariff which has not been properly allocated to the coffee business is the deadweight loss. Question 6: 123 57.5 58 58.5 59 59.5 60 60.5 61 61.5 62 62.5 quantity price a.Marginal cost curveDemand curve
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b.Marginal Revenue c.123 0 20 40 60 80 100 120 140 160 180 200 TOTAL REVENUE TOTAL REVENUE Profit maximising price and quantity In this graph the shaded region represents the price 177 units of total revenue is the profit maximisation level of quantity is the profit maximising price and quantity.
d.Consumer surplus is referred to as the level where the consumer is already satisfied after the purchase of the commodity. The profit-maximizing quantity of output is the level of output in which the firm is able to earn the maximum profit. e.A deficit which results from improper allocation the resources properly states that deadweight loss (Varian, 2014).For instance, price ceilings, and other controls create deadweight loss Distributional effects of monopoly are No economic growth- In case of monopoly the entry of others is so the market does not face growth. Inequality of amount of goods and services available with different persons-Due to monopoly the low-income groups are not able to get proper services because the sellers can charge any high price at any point of time (Varian, 2014). Customers cannot move to other sellers as there is only one seller. Question 7: a.Characteristics of monopolistic competition Numerous buyers and sellers-In case of Monopolistic competition there are a large number of buyers and sellers.The firms in the industry have the power to control their price and their output levels. Highly distinguishable products-Products that are sold by the firms in the monopolistic market are different but they are close substitutes for each other (Kirzner, 2015). The products may have slight differences in terms of colour, design but they are the same. No barriers regarding entry and exit-In case of the monopolistic market there are any barriers regarding entry and exit. Huge selling costs-In case of monopolistic competition, the firms sell the huge amount of costs on advertisements (Kirzner, 2015). Actual knowledge not available-Buyers and the seller's do not have full knowledge of the products. This is because there are a large number of substitutes. Negatively sloping demand curve- The demand curve of a perfectly elastic market is negatively sloping.
b.Firms in monopolistic competition competitors with price and non-price policy. Sometimes they try to decrease their price and sell their products in order to compete with other firms (Kirzner, 2015). On the other hand, they also adopt non-price policies which include giving guarantees and assured gifts on purchases. c.In the perfectly competitive market, the firms have less efficiency because they cannot change their price and earn profits which are possible in case of monopolistic competition. In terms of efficiency the monopolistic market is more profit because they can reduce their price and get a large amount of sale whereas in perfect competition they are not able to earn huge abnormal profits or excess capacity profits in the long run by reducing price and selling in huge amount because all the products are fully same (Qadiret al.2014, p.282). On the other hand in case of perfect competition, the firms are price takers. Price remains the same irrespective of the level of output or production which does not occur in case of monopolistic competition. Question 8: a.The graph shows a firm in the perfectly competitive market. This can be told because the Marginal revenue is equal to the price. In perfect competition MR=P because of the gets the same price whichever quantity it sells. b.In case of short-run production, the perfectly competitive firm can make positive economic profits. This is because the point of output which is intersected marginal cost equalises with the amount of marginal revenue which is equal to price (Nomidis, 2016). As the firm is able to cover the price of the product the firm would not be in a position to earn abnormal profits or profits in excess. In the short run, the firm would produce the quantity of output which would cover the normal profits. c.In case of long run, the firm can decide about the amount of output according to the price which can cover normal profits. The forces of demand and supply can affect the situation of the long run equilibrium (Negishi, 2014, p.9). In the long, the whole of the Q would be sold at the price or P that prevails. There is free entry and exit in the long run and all the other firms would cover only normal profits.
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Question 9: a.To differentiable features of Oligopoly are: Free entry and exit-In case of Oligopoly, there is tough competition among the firms. Old firms can easily move out of the industry if they are not able to survive in the competition and the new firms can enter the industry to compete with member firms. Firms dependent on each other-Firms in Oligopoly market are dependent on each other regarding the business decisions that they take. For instance, if one firm adopts the policy of effective advertisement then the other firms immediately follows it. b.Firms in Oligopoly are interdependent to each other because there are many sellers that are able to capture the market and want to face cut-throat competition with each other (Whisenant & Willenborg, 2016). Each firm wants to dominate the other. They often follow each other and the firms in an Oligopoly market adopt the policy of competition with each other not with the price but with respect to other aspects. c.Prisoners Dilemma is referred to as the paradox that is related to decision making. In this case, there is a conflict in the decision between two persons even if the decisions are for their interests. Prisoner's dilemma isknown as the game theory. This explanationisrelatedtoOligopolybecausebusinessfirmsinanOligopoly competition undertake certain decisions but they are not sure about the actions that their competitors would take if they would execute their decision (Ishii & Zhang, 2017, p.513). The concept of prisoner's dilemma establishes the idea of the selfish behaviour of rival firms contrary to the best outcomes for both the firms.
Reference list Azevedo, E. M., & Gottlieb, D. (2017). Perfect competition in markets with adverse selection.Econometrica,85(1), 67-105. Friedman, M., (2017).The quantity theory of money(pp. 1-31). Palgrave Macmillan UK. Ishii, J., & Zhang, D. H. (2017). Options compensation as a commitment mechanism in oligopoly competition.Managerial and Decision Economics,38(4), 513-525. Kirzner, I. M. (2015).Competition and entrepreneurship. University of Chicago Press. Kurzban, R., Duckworth, A., Kable, J. W., & Myers, J. (2013). An opportunity cost model of subjective effort and task performance.Behavioral and Brain Sciences,36(6), 661-679. Negishi, T. (2014). Firms and Production. InElements of Neo-Walrasian Economics(pp. 9- 27). Springer Japan. Nomidis, D. (2016). A Revision of the Theory of Perfect Competition and of Value. Posner, R.A., (2014).Economic analysis of law. Wolters Kluwer Law & Business.
Qadir, M., Quillérou, E., Nangia, V., Murtaza, G., Singh, M., Thomas, R. J., ... & Noble, A. D.(2014,November).Economicsofsalt‐inducedlanddegradationandrestoration. InNatural Resources Forum(Vol. 38, No. 4, pp. 282-295). Shapiro, M. D. (2016).Supply shocks in macroeconomics(pp. 1-7). Palgrave Macmillan UK. Varian,H.R.(2014).IntermediateMicroeconomics:AModernApproach:Ninth International Student Edition. WW Norton & Company. Varian,H.R.(2014).IntermediateMicroeconomics:AModernApproach:Ninth International Student Edition. WW Norton & Company. Whisenant, S., & Willenborg, M. (2016). Price Competition Within the Large Audit Firm Oligopoly: A Panel Data Analysis of Initial Engagements.