BBM102/05 Microeconomics TMA 2 Assignment: Economies, Markets

This assignment is a solution to a Tutor-Marked Assignment (TMA 2) for the BBM102/05 Microeconomics course at Wawasan Open University. The assignment covers key microeconomic concepts from Units 3 and 4. Question 1 explores economies and diseconomies of scale, examining the factors that contribute to each. Question 2 analyzes and compares perfect and monopolistic competition, including their similarities, differences, and short-run equilibrium. Question 3 delves into monopoly power, identifying sources such as location and government restrictions, and explaining profit maximization. Question 4 presents a numerical problem involving cost, revenue, and profit calculations, and also requires the identification of market characteristics. The assignment provides detailed explanations, diagrams, and calculations to illustrate the concepts.

Running head: MICROECONOMICS
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Table of Contents
Question 1........................................................................................................................................2
Question a....................................................................................................................................2
Question b....................................................................................................................................3
Question 2........................................................................................................................................3
Question a....................................................................................................................................3
Question b....................................................................................................................................4
Question 3........................................................................................................................................5
Question a....................................................................................................................................5
Question b....................................................................................................................................6
Question 4........................................................................................................................................7
Question a....................................................................................................................................7
Question b....................................................................................................................................7
Question c....................................................................................................................................8
References......................................................................................................................................10

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Question 1
Question a
Economies of scale refers to the cost advantage that a firm achieve with expansion of
production in longer term. Firms enjoy some cost advantages from a large scale of production.
The advantage in costs are attained in the form of a lower unit cost production. Economies of
scale is a long run concept. Economies of scale are realized from increasing sales of the firm.
This leads to an increased saving of the firms which in turn induces firm to purchase raw
materials in bulk and enjoy discount resulting in economies of scale. Diseconomies of scale is
said to arise when average cost increases with increase in output (Baumol and Blinder 2015).
This might happen when firms expand on a very large scale. Because of diseconomies of scale,
large firms often produce products and services at a high cost.
Figure 1: Economies and diseconomies of scale

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Question b
There are both internal and external factors that lead to economies of scale. Internal
economies of scale arise because of factors like investment in advanced technology, change in
marketing budget, advantages of lower interest rate on borrowed money and managerial and
commercial advantages. All these contribute to a lower average cost with expansion of output.
Economies of scale can also occur because of factors outside the firm (Sloman and Jones 2017).
Some example of such external factors include increasing access to a better skilled labor, higher
credit and transportation facilities, broader information base and disintegration.
Question 2
Question a
Perfect competition and monopolistic competition
Similarities
 In both the market, there is a large number of operating firms
 In both form of market firm can enjoy a super normal profit or an economic loss only in
the short run. Firms in these markets can earn only a normal profit in long run.
Differences
 In perfectly competitive market, each firm sells homogenous product. Buyers thus have
an equal preference for product sold in the market. In contrast, product differentiation is
one distinguishing feature of monopolistically competitive market. The products in the
marketplace though is similar but not homogenous in nature.

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 In the long-run, firms in perfectly competitive market operate at socially efficient point
that is at the minimum point of average cost (Hill and Schiller 2015). Firms in the
monopolistically competitive market on the other hand produce to the left of average cost
and thus operate with excess capacity.
Question b
Short-run equilibrium under monopolistic competition
The short run equilibrium model of monopolistic competition is similar to that of
monopoly. Firms in the short run thus can have either a supernormal profit or normal profit or
economic loss as entry or exit does not occur over the short period. The short run equilibrium is
illustrated in the figure below
Figure 2: Equilibrium in monopolistic competition

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Short run equilibrium in the market occurs where the marginal cost curve equalizes with
marginal revenue (Cowen and Tabarrok 2015). The point E. thus shows the equilibrium point.
Corresponding to the equilibrium point, price and quantity in the market are P* and Q*
respectively. At the described equilibrium condition, firms earn an economic profit equivalent to
the area P*ARB. Monopolistically competitive firm earn only a normal profit when MC = MR <
AR = AC. Economic loss occur when MC = MR < AR < AC.
Question 3
Question a
i)Location
Monopoly power often arises from locational advantage. Sellers operate in a market that
is isolate by a considerable distance from the rivals’ results in high degree of monopoly power
(Chiang 2017). Local Movie Theater in the small town showing movies in the first show enjoys a
monopoly power.
ii) Government restriction
Government restriction acts as a source of monopoly power by granting some special
permission to a single firm. One example of such monopoly is Astro in Malaysia. Barriers to
entry of new firms is one way of impeding competition in the market. Astro is the single satellite
company in Malaysia that has an exclusive transmission license granted by the government for
broadcasting 20 years in the country (Kee et al. 2015). This creates a considerable barrier to the
entry of new firms. This has prevented other firms to offer a similar service in the nation creating
a monopoly position of the company.

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Question b
A monopolist maximizes profit corresponding to a point where marginal revenue equals
marginal cost. No monopolists however ever set output at inelastic part of the demand curve. It is
always possible for the monopolist to increase revenue by lowering output. Under such a
circumstance revenue increases with increase in output and decrease in price making marginal
revenue negative. In contrast, since marginal cost is positive and increasing, under equilibrium
decline in output for increasing price lead to a decline in marginal cost (Baumol and Blinder
2015). Equilibrium in a monopoly market can possibly occurs when elasticity of average revenue
curve exceeds 1. This is shown in the figure below
Figure 3: Equilibrium under monopoly

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At point A, Ep > 1, at point B Ep = 1 and at C Ep > 1. The only possible equilibrium
point in the market corresponds to point A. P is the equilibrium point in the market.
Question 4
Question a
Quantit
y (Unit)
Price
(RM)
Total Cost
(RM)
Total Revenue
(RM)
Marginal Revenue
(RM)
Marginal Cost
(RM)
0 35 10 0
1 30 20 30 30 10
2 25 25 50 20 5
3 20 35 60 10 10
4 15 50 60 0 15
5 10 70 50 -10 20
6 5 95 30 -20 25
Question b
i)
Equilibrium price = 20 RM
Equilibrium output = 3 unit
ii)

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Quantit
y (Unit) Profit/loss
0 -10
1 10
2 25
3 25
4 10
5 -20
6 -65
Question c
i)
This firm is operating under monopolistically competitive market
ii)

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From the above table, demand curve of the concerned firm is downward sloping and
relatively elastic in nature. Price is larger than marginal revenue. All these characteristics
indicate that the market is monopolistically competitive.
iii)
Two characteristics of this market are
 A large number of seller operate in the market (Cowen and Tabarrok 2015)
 Firms sell a differentiated product

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References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Sloman, J. and Jones, E., 2017. Essential Economics for Business. Pearson.
Hill, C. and Schiller, B., 2015. The Micro Economy Today. McGraw-Hill Higher Education.
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan
International Higher Education.
Chiang, E.P., 2017. Microeconomics: Principles for a Changing World. worth publishers
Macmillan Learning.
Kee, C.P., Nie, K.S., Korff, R. and Helbardt, S., 2015. Malaysia’s contemporary broadcast media
regulation through the eyes of regulators. Journal of Asian Pacific Communication, 25(2),
pp.231-242.