Microeconomics: Market Structures and Firm Behavior

This microeconomics assignment explores different market structures – perfect competition, monopoly, oligopoly, and monopolistic competition. It analyzes the characteristics of each structure, including the level of competition, knowledge, pricing power, and number of firms. The assignment also examines firm behavior in relation to marginal cost (MC), average cost (AC), and average variable cost (AVC), discussing how these factors influence production decisions and profitability. Specific examples like Apple's operation in an oligopoly market are used to illustrate concepts.

Running head: MICROECONOMICS
Microeconomics
Name of the student
Name of the University
Author note

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Table of Contents
Question 1:.......................................................................................................................................2
Question 2:.......................................................................................................................................2
Question 3:.......................................................................................................................................2
Question 4:.......................................................................................................................................2
Question 5:.......................................................................................................................................2
Question 6:.......................................................................................................................................2
Question 7:.......................................................................................................................................2
Question 8:.......................................................................................................................................2
Question 9:.......................................................................................................................................2
Question 10:.....................................................................................................................................3

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Question 1:
Monopoly is known as the market situation, where a single firm is the producer of a
product leading to complete control over the market and that firm serves large number of buyers.
A monopoly firm is considered as the price maker due to its complete control over the supply of
goods and services (Zeuthen 2018). Products produced by a monopoly producer do not have any
substitute and due to their ability to control market, they produce less and charge higher price.
Part A of Figure 1, showcase the monopoly market situation, where it produces Qm amount of
output and sells it at Pm price.
Monopolistic competition is one of the imperfect market situations, where many
producers sell highly differentiated products; however, they are not perfect substitute. The
number of buyers in this market scenario is large and number of sellers is moderate; higher than
the monopoly market but lower than the perfect competition (Nikaido 2015). Market power in
the case of monopolistic competition is lower and market supply is subject to competition. Part B
of Figure 1, depicts the monopolistically competitive market condition, where price is Pl and
quantity is Ql.

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Figure 1: Long run Monopoly v/s monopolistically competitive firm
Source: (Created by Author)
Comparing the monopoly market with the monopolistically competitive market, various
differences can be seen. As the figure 1 depicts, long run price of the monopoly market is much
higher than the monopolistically competitive market. Moreover, output in the perfect
competition is lower than the monopolistically competitive market output. Difference between
the Ql and Qm is the output difference between the monopoly output and monopolistic market
output in the long run. When it comes to price, then difference in Pm and Pl is the price
difference between the both market in long run. From here, it can be seen that monopoly profit is
higher. However, in long run, inefficiency in both types of market leads to lower efficiency. It
can be seen that both the market are inefficient due to presence of deadweight loss. It decreases
consumer surplus and enhance producer surplus with substantial amount of deadweight loss.
Part A Part B

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Question 2:
Price discrimination is a condition, where manufacturers charge different price for same
product to the different consumers, where the difference in supply cost is not reflected by the
price difference. Conditions for price discrimination are as follows:
Varied Price Elasticity of Demand is necessary
There are barriers to prevent consumer switching
Supplier need to be potent to discriminate the market into sections
Question 3:
Price and output level in an oligopoly market is indeterminate because firms are mutually
dependant for the pricing policy. Thus, it has become hard for the economists to determine
theory of output and price under the oligopoly market (Ciliberto, Murry & Tamer 2016).
However, Sweezy came with kinked demand curve model in 1939 to determine the demand and
output in the oligopoly market.
Figure 2: Kinked demand curve
Source: (tutor2u 2018)
An oligopoly firm faces two-demand curve, depending upon the price, which are dd’ and
DD’. For low price, it faces inelastic demand curve DD’ (Figure 2) and in case of high price, it

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faces highly elastic demand curve dd’ (Figure 2). Due to high interdependence on the rivals in
case of oligopoly market, if there is any change in price, then it will alter the demand for other
firms too. For instance, if the price of a firm is increased, then demand would shift from DD’ to
dd’ and the consumer will switch to the rival fir. It will enhance the demand of the rival
oligopoly firm and dP part of demand curve dd’ will be more elastic, that placed above the
present market price. If there is price cut in the rival firms, then consumer will shift to rival
leading to forced shift of demand curve from dP to DP. Thus in oligopoly market, there is kinked
demand curve.
Question 4:
Three types of capabilities identified in the Resource Based Theory of the firm used to
increase long-term competitiveness are as follows (Wu & Chu 2015):
Resources are valuable: resources aid to enhance the effectiveness of the firm; moreover,
it helps to increase efficiency of the firm.
Resources are rare: Resources are rare and it helps to produce goods and services. Who
have the resource, that firm will have competitive advantage.
Resources are non-substitutable: resources cannot be synthesised, thus, it is important to
produce new goods.
Question 5:
Rule of employing factors of production is as follows (Henderson 2014):
Check whether to produce or it is good to shut down
Decide how much to produce
Select the ideal input combination to be used in production
Chalk out the technology requirement

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Figure 3: Rule of employing factors of production
Source: (Harper 2015)
As the figure 3 describes, managerial economics can be used to imply the above
mentioned rules, where input factors like land, labour and capital is used with ideal technology
to produce environment friendly goods and services.
Question 6:
Figure 4: Demand and supply of Land resource
Source: (Spaulding 2018)

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Land is non-exhaustible resource that cannot be produced. Thus, the only factor that can
alter the price of land is demand. With higher demand price will go up (P2) and in case of
reduction in demand, price will fall (P1).
Supply curve is highly in elastic in nature.
Question 7:
Price decision Level of competition Level of knowledge
Perfect competition Price taker High Perfect knowledge
Monopoly Price maker Nil Imperfect knowledge
Oligopoly Partial control Few Imperfect knowledge
Monopolistic
competition
Rigidity in price Large Imperfect knowledge
Table 1: Difference of 4 types of market
Source: (Created by author)
According the table 1, it can be seen that perfect competition market has high number of
competitors, who have complete knowledge of market and price is decided naturally. On the
other hand monopoly is another form of market where number of sellers is only one and posses
imperfect knowledge about market. Being the only producer, monopoly producer is price maker
(Shen & Bjork 2015). In case of oligopoly market, both of them have imperfect market
knowledge and they are doing not have complete control over market due to large numbers of
seller compared to monopoly market.

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Question 8:
If a firm makes loss, then it means it is not able to earn normal profit where MC is equal
to the Average Cost (AC). Now if the firm is not able to its Average Variable Cost (AVC) too,
then the firm has to shut down. Thus, the proposition is not true.
Question 9:
The ability of a firm to keep producing in the short run lies in the MC, AC and AVC. If
the firm produces at MC, then it would produce at normal profit and the production will continue
until it reaches to shutdown point (Burke, Hsiang & Miguel 2015).
Question 10:
Apple operates in oligopoly market, where the producers create close substitute product.
However, branding of the firm, marketing and product differentiation has aided the brand to have
competitive advantage when it introduced the iPhone.

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Reference:
Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on
economic production. Nature, 527(7577), 235-239.
Ciliberto, F., Murry, C., & Tamer, E. T. (2016). Market structure and competition in airline
markets.
Harper, C. (2015). Organizations: Structures, processes and outcomes. Routledge.
Henderson, J. V. (2014). Economic theory and the cities. Academic Press.
Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). Princeton
University Press.
Shen, C., & Björk, B. C. (2015). ‘Predatory’open access: a longitudinal study of article volumes
and market characteristics. BMC medicine, 13(1), 230.
Spaulding, W. (2018). Economic Rent. [online] Thismatter.com. Available at:
https://thismatter.com/economics/economic-rent.htm [Accessed 27 Jan. 2018].
tutor2u. (2018). Oligopoly - Kinked Demand Curve | tutor2u Economics. [online] Available at:
https://www.tutor2u.net/economics/reference/oligopoly-kinked-demand-curve [Accessed 27 Jan.
2018].
Wu, L., & Chiu, M. L. (2015). Organizational applications of IT innovation and firm's
competitive performance: A resource-based view and the innovation diffusion approach. Journal
of Engineering and Technology Management, 35, 25-44.
Zeuthen, F. (2018). Problems of monopoly and economic warfare (Vol. 25). Routledge.