Principles of Economics - Assignment
Added on - 28 May 2020
Showing pages 1 to 4 of 15 pages
Running head: PRINCIPLES OF ECONOMICSPrinciples of economicsName of the universityName of the StudentAuthor Note
1PRINCIPLES OF ECONOMICSAnswer 1:a)i)Some real life examples of monopolistic competitive market are restaurants,hairdressers, designing clothes, different petrol stations and different television programmes.They operate under this market structure because there are large numbers of similarorganisations and every one operates independently (Parenti, Ushchev & Thisse, 2017).Though they are selling same types of products, all products are not exactly same. They areclosely substituted with each other. Hence, product differentiation can be seen here.Moreover, each firm can easily enter or exit from this market.Under monopolistic competitive market, profit maximising condition of each firmunder short-run can be described. Firstly, marginal cost (MC) and marginal revenue (MR) afirm will be equal to each other, that is, MR=MC. Secondly, product differentiation will helpeach organiser to increase their profit level in the short-run (Nikaido, 2015). Moreover, thedemand curve or average revenue (AR) curve and marginal revenue (MR) curve will beelastic.
2PRINCIPLES OF ECONOMICSOOutputAR= Demand curveMRMCACATCPrice, MR, AR, ATC, AVC, MCABCDFig 1: Short-run profit maximising condition: Monopolistic Competitive MarketSource: (created by author)In the above figure, average revenue curve or demand curve and marginal revenuecurve are drawn by a negatively sloped line. In the vertical axis, marginal cost (MC), averagetotal cost (ATC) and average variable cost (AVC) of short-run monopolistic competitivemarket are drawn. Moreover, average revenue (AR), marginal revenue (MR) and price arealso measured in this axis (Nikaido, 2015). In the horizontal axis, total output is measured.ABCD area indicates short-run profit of a monopolistic competitive firm.ii)Some examples oligopoly market in Australia is motor vehicle industry (Holden andFord), supermarket industry (Woolworths and Coles) and banking industry (NationalAustralian Bank, Commonwealth Bank, Australia and New Zealand Banking Group) and soon.
3PRINCIPLES OF ECONOMICSD = ARMRMCPrice, MC, AR, MROOutputQoPoUnder dominant firm price leadership concept, a dominant firm set prices for itsproducts. Other follower firms only follow this same price level (Ibrahim, Saaban & Zaibidi,2017). Dominant firm enjoys maximum shares of the market. Leader firms set its price whenmarginal costs and marginal revenues equate with each other, that is, MC=MR. Here, thedemand curve of both leader and follower firms are negatively sloped.Fig2: Dominant firm price-leadership modelSource: (created by author)In this above figure, average revenue, marginal revenue and marginal cost curve of aleader firm is drawn (Cabral, 2017). The leader firm set its equilibrium price at Po.Hence, thisprice is the equilibrium price level, which other follower firms will follow.b)