Advanced Microeconomics: Market Structures and Efficiency

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UNIT: Business Economics BUECO5903

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Table of Contents
Question 1 (a)..............................................................................................................................................3
Question 1 (b)..............................................................................................................................................4
Question 2 (a)..............................................................................................................................................5
Question 2 (b)..............................................................................................................................................7
Question 3 (a)..............................................................................................................................................9
Question 3 (b)............................................................................................................................................10
Question 3 (c)............................................................................................................................................11
Question 6.................................................................................................................................................12
Question 7 (a)............................................................................................................................................15
Question 7 (b)............................................................................................................................................16
References.................................................................................................................................................18

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Question 1 (a)
In case of a lone seller that is when there is a pure Monopoly then the market can uphold
incompetent allocation of resources. The allocative efficiency is economic idea with respect to
efficiency at the social level. It is the production of the optimal quantity of output wherein the
marginal benefits to society of an added unit would be identical to the marginal cost (MC). In the
area of perfect competition the strategy of profit maximization was for every form to create the
quantity of output at the level where price = MC. The price shows the demand and therefore it
evaluates the way in which purchases value the courts however the MC is the assessment of what
the next unit of production costs the society for producing (Ollivaud, 2017). As per this rule the
allocative efficiency is maintained. In case prices more than the MC then the marginal benefit to
the society is more than the MC to the Society for production of an extra unit, therefore more
quantity has to be produced. But in case of Monopoly that is the single seller, the profit
maximization level of output has price always more than the marginal cost. This can be shown in
the image below:
Marginal cost (MC)
M
Pm
Pc C
Demand (P) = (AR)
Qm Qc Marginal Revenue
Quantity
The efficient allocation needs production at the level Qe at which MC=P. In case of monopoly the
lesser output is produced and selling at more prices for maximizes profits at Qm and Pm.
Therefore monopolies don’t create adequate output or efficient allocation. In these cases the
Monopoly business might strive for latest inventions and latest intellectual property as they want
to maintain their inefficient allocation of resources and want to earn extraordinary profits.
Monopolies can lift price over the MC of producing and are allocatively inefficient. This is for
the reason that monopolies can influence market and can boost price to lessen consumer surplus.
Total cost/ Total revenue (£)

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Question 1 (b)
Monopoly market is where there are many buyers but a very few number or even a sole seller in
the market. Like other market structures, Monopoly has benefits and perceived disadvantages as
well. The Monopoly market has the stability of prices for most of the items as just one firm has
to make decision for setting the price. There is flexibility because when the seller wants to
change the price he can do that easily and the government gets revenue in the form of taxes from
Monopoly business.
Because there are no competitors therefore there are a huge number of sales and the Monopoly
business has a tendency to get Super profits (Caglayan and Xu, 2014). the super profits can be
used for launching other items, research and development and other beneficial aspects. However
there are certain perceived disadvantages to the seller as well because the seller might be
enjoying the Monopoly and therefore it might ignore the possibilities of enhancing the efficiency
and it might not invest more into research and development for further growth. this can also
bring bad name for the organization because mostly the Monopoly leads to exploiting the
consumers with huge prices.

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Question 2 (a)
For benchmarking the allocative efficiency, the market is utilised where there is optimal
distribution of commodities and services, considering the inclinations and choices of the
customers. It is used for giving a highly precise definition for allocative efficiency which is the
level of output where the MC of production and price are equal. This is due to the fact that the
price what the consumers want to pay is equal to the marginal utility (MU) that they attain. So
the optimal distribution is attained at the level where the MU of the item = the MC (Chen and
Irarrazabal, 2013).
This can be shown as per the image below where the output of 40 has the MC of item as $6.
However, at this output the clients would like to shell out a price of $15. The goods marginal
utility is reflected by the price which is more than the MC therefore this shows the under-
consumption. In case that what is raised and the price drops then the society would have higher
advantages from enjoying further of the goods.

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Price S=MC
Q2 Allocative inefficient
15 MU>MC
Q1, Allocative efficient
11 MU=MC
6
D=MU
S=MC
$17 Allocative efficient
MU=MC Allocative Inefficient
$11 MC>MU
$7 D=MU
$110 Q
As in the image the output of 110, the MC is $17 however people want to shell out only $7
which is the anticipated price. At this level of MC is quite higher than the marginal benefit that is
$17 and $7 therefore there is over consumption and the market is having over production of this
item. The allocative efficiency will take place at $11 and the pricing where the MC and MU are
equal. therefore the perfect competition is considered as the benchmark for allocative efficiency.
It is shown in the image below:
40 70 Q

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Firm in perfect competition MC Industry in perfect Competition
$ $
AC S
P1 P1
D=AR=MR
D
Q1 Qe
The businesses in the perfect competition create allocative efficiency level as the Q1 is the level
where price = MC. The organizations in perfect competition are thought to create at an allocative
efficient level as at Q1, P=MC.
Question 2 (b)
Markets that have monopolistic competition are unsuccessful to get allocative efficiency because
of two reasons. The first basis of inefficiency is because at its optimum amount produced, the
organization charges a price that goes above MC. This monopolistic competitive organization
makes the best use of profits when the MR = MC. A monopolistic competitive firm’s demand
curve has a downward slope, so it will charge a price that is over the MC. The market influence
held by a monopolistic competitive organization is that at its profit maximization level of
production there will be a producer surplus and net loss of customer.
Also there cannot be efficiency because these organisations operate with the excessive capacity.
The profit maximization output is lower than the output link to the minimum average cost (AC)
of the output. Irrespective of the kind of market, every organisation produces to the level where
demand is equal to the average cost. In this type of market this takes place when demand curve
slopes downwards and in the long-term, this causes excessive capacity (Bradfield, 2007).
The image below shows the demand curve of monopolistic competitive market sloping
downward and with the decrease in prices for mother quantity demanded for the items and
answers. In this market the profit can be maximized when the level of production is where the
MC=MR. Because of the find of pricing in the market, consumer surplus Falls below the pareto

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optimal level that would be there in perfectly competitive Markets and therefore the market will
face deadweight loss. The suppliers in this market too will have excessive producing capability.
Price
D
Deadweight Loss
Pm
MC
Pc Producer
Surplus
MR
Qm Qc Quantity

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Question 3 (a)
MC MP
Cost
The u shape of the marginal cost curve (MCC) is closely linked with the hump shaped marginal
product curve. The rising proportion of marginal product curve (MPC) is correspondent to the
declining portion of the MCC. Similarly the MC of production at the minimum when the
marginal product reaches maximum. This is because of the variable cost closely linked with the
cost of using the variable input in the short run. In the short run the wage rate is constant and it is
visible to recognise a connection amongst these two curves. The link among these two curves
shows the law of diminishing marginal returns as the major reason for rising MC. In the stage 2
of production the marginal returns drop the MC increase. MC is the expression of the marginal
product and diminishing returns (Shelegia, 2012). The shape of the organisations cost curve is
decided by the technology it applies. When the MC is at minimum at the same output, the
marginal product will be at maximum. Looking at this diagram below the marginal product and
Marginal ProductMarginal Cost
Labour

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the MC for production of an organisation have been shown where in the above panel shows the
marginal product of variable input utilised for producing the items. The lower panel of the
diagram shows the MC of production. The product curve in the above panel has a unique hump
shape with the marginal product increasing and reaching to its maximum then dropping down.
The maximum portion of the MPC is due to the rising marginal returns. The drop after the
maximization can be attributed to the drop in the marginal returns and specifically to the laws of
diminishing marginal returns. However, the MCC in the below panel has a unique shaped
creating a “U- shape”. This shows that MC has dropped and reached its minimum and then it
started rising. The drop to the minimum is because of marginal returns and after this the race is
attributed to the Drop in the marginal returns, specifically because of the law of diminishing
marginal returns.
Question 3 (b)
Taking an example of a firm has an option of changing a plant by substantially tiny progressions
causing the countless ACCs (ACCs). In this case, the smooth curve enclosing each one of these
short-run ACCs forms a long run ACC.
SAC1 SAC6 SAC7
SAC2 SAC5
P SAC4
Long run cost curve = Many small run cost curves
In the image above, it can be observed that the long run ACC is made tangential to each SAC. It
can also be said that, each point on the long run ACC is a tangent point on an SAC. therefore,
Average Cost
SAC3
LAC

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when a firm wishes to have a multi plant operation to create a certain output, it functions on the
related SAC.
Question 3 (c)
In the above diagram there are many short run ACC which can be considered as the ACC for
different plant operations. In every plant there would be a short run ACC and therefore these are
collectively put into the graph, which together form the whole of the ACC for the long run (Yang
et al., 2017). When any organisation works in to multi-plant then there are small phases or short
run average cost linked with every plant of operation. All these combined together and
developed by the long run ACC as shown in the above image.

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Question 6
Pollution is important negative externality and can come from various activities. Nitric acid and
sulphuric acid can cause industrial pollution because of the by-products of the production
procedure in various Industries like refining and smelting industry. even transportation, lighting
and heating or storing of waste and disposal of waste can cause pollution-.
The market mechanism is the method by which the forces of supply and demand decide about
the price and quantities of goods and services offered for selling in the market. there are various
types of pollution and these externalities can be handled or controlled by two different
mechanisms in economics which are the taxation on pollution as well as transferable permits
(Christiansen and Smith, 2012).
A common method of aligning the private and social cost of negative externality is by charging
the Tax amount from the polluting firm on the basis of the damage caused by the business. The
producers MC is increased and therefore the producer is forced to reduce the amount of output
produced. In the below image, point A is the level of output in cased the cost for polluting dates
neglected and b is the socially optimal production. Within this image it has to be observed that
the optimal level of pollution is not always equal to zero because usually there is argument by
various environmentalists. Secondly it has to be observed that environment usually has little
assimilative capability therefore up to a particular level of production there isn't any pollution
cost.
Y MEC
X S
T
O C B A
There can be simple flat-rate tax imposed by the government which is XY on the output which
would eliminating centre of increasing production over the socially optimal level B. a flat rate